FRANKFURT--German consumer-price growth stabilized at a very low
rate in August, putting added pressure on the European Central Bank
to take more dramatic steps to prevent ultra-low inflation from
gripping the euro zone and further damaging the bloc's stagnant
economy.
The Federal Statistics Office said the annual rate of inflation
in Europe's largest economy, measured according to a common
European Union method, was 0.8% in August, unchanged from July's
reading. Prices were flat compared to last month.
The August reading was driven by a sharp decline in energy
prices, which were offset by a slight rise in food inflation and an
increase in services prices.
Euro-zone inflation figures for August, due Friday, are expected
by many economists to weaken to 0.3%, on an annual basis, from
0.4%. That is far below the ECB's target of just under 2% over the
medium term.
Low German inflation makes it harder for struggling economies in
southern Europe to rebalance their economies. In order for Spain,
Portugal and others to become more competitive, they need to have
inflation rates below that of Germany.
If Germany's inflation rate were 2% or higher, they could do
this with lower, but positive, rates of inflation. With German
consumer prices growing so slowly, however, countries in southern
Europe must run super-low, or even negative, rates of inflation to
restore competitiveness. That raises the risk of a deflationary
spiral that threatens consumer and business spending while making
it harder for companies and governments to service debts.
While German inflation hovers under 1%, Spain's rate has turned
negative, a trend that intensified in August. Consumer prices
shrank 0.5% from last year, the country's statistics office said,
compared to a 0.3% drop in July. Deflationary forces are starting
to threaten healthier economies in northern Europe, too. Belgium
reported Thursday that its inflation rate plunged to 0.02%, a
nearly five-year low.
In a speech Friday, ECB President Mario Draghi warned that low
inflation may be gaining a foothold in Europe because financial
markets are reducing their expectations for future consumer-price
growth. "Over the month of August financial markets have indicated
that inflation expectations exhibited significant declines at all
horizons."
The ECB "will acknowledge these developments and within its
mandate will use all the available instruments needed to ensure
price stability over the medium term," he said. The ECB meets next
on Sept. 4.
Mr. Draghi's emphasis on inflation expectations--which are
central to the medium-term price outlook--opened the door wider to
large-scale purchases of public and private debt by the ECB, known
as quantitative easing, analysts said. Equity markets have rallied
this week on these hopes and bond yields have fallen. The euro has
weakened on expectations of more ECB stimulus.
Still, many economists expect the ECB to wait and see how other
stimulus measures pan out before embarking on quantitative easing,
which is deeply unpopular in Germany. In June, the ECB reduced
rates to record lows and unveiled a four-year lending program for
banks. The first installment will be next month.
Economists at Nomura and J.P. Morgan Chase expect the ECB to
lower their key interest rates further at next week's meeting.
Christopher Bjork also contributed to this article.
Write to Emese Bartha at emese.bartha@wsj.com
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