Deflation is Now on the ECB’s Table to Fix

“(Reuters) – Modeled on the hawkish, inflation-fighting Bundesbank, the European Central Bank is used to focusing on containing price rises rather than worrying about them increasing too slowly – or even falling.

But now ECB policymakers are keenly aware that inflation in their 17-country euro zone risks slipping further below their target of just under 2 percent, even if they insist deflation is not a threat.

The concern – which will add to pressure for the bank to cut interest rates or take other “easing” actions – has been highlighted by a slide in Greek inflation to below zero.

So far Greece, which entered deflationary territory in March for the first time in 45 years, is an isolated case. But price pressures are weak elsewhere in the euro zone periphery once tax rises are discounted.

In Portugal, annual inflation is running at 0.5 percent, although Nordea analyst Holger Sandte calculates consumer price inflation measured at constant tax rates is just 0.3 percent there. It is at 0.7 percent in neighboring Spain, he says.

“Given the recession, rising unemployment and tight fiscal policy in these countries, it would be no surprise at all to see rates below zero at least for a few months this year,” said Sandte, one of a batch of analysts to put out research notes in recent days on the risk of a drift towards deflation.

Even in France, inflation slowed to 1.1 percent in March….”

Full article