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Europe dips into deflation amid Covid hit

Eurozone inflation turned negative last month for the first time since May 2016, raising chances that the European Central Bank will have to inject yet more stimulus to generate price growth which has undershot its target for over seven years.

Annual inflation in the 19 countries sharing the euro fell to minus 0.2pc in August from 0.4pc in July. Most economists had forecast that inflation would fall, but remain in positive territory at plus 0.2pc.

The sharp fall seen last month is a far cry from the ECB’s target of just under 2pc.

Worryingly for policymakers, underlying inflation also tumbled, suggesting that the bloc’s deepest recession in living memory is not just a temporary shock but could prove to become a bigger and longer-lasting drag on consumer prices. Inflation excluding volatile fuel and unprocessed food prices, which is closely watched by the ECB, fell to 0.6pc from 1.3pc while an even narrower measure, which also excludes alcohol and tobacco, slowed to 0.4pc from 1.2pc. Both were far below analysts’ expectations.

“There is no escaping the disinflationary effects of the crisis, at least over the coming quarters,” Pictet Wealth Management Strategist Frederik Ducrozet said.

“We stick with our view that the ECB will ultimately increase the Pandemic Emergency Purchase Programme envelope again, most likely by €500bn in December.”

ECB Chief Economist, and former Central Bank of Ireland Governor, Philip Lane recently warned that complacency risked entrenching low inflation and reducing price growth expectations, making it even more difficult for the bank to deliver on its target.

Some economists took his words as a hint it would expand stimulus even further.

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