Zero Inflation Rate Is Good News For Printing

The annual inflation rate in the 19 countries that use the euro crept up to zero in October, another weak reading that could help push the European Central Bank to expand its stimulus program.

The rate rose from minus 0.1 per cent the month before, the European Union statistics agency Eurostat said Friday.

Falling energy prices were a major factor in keeping the rate low. Weak price increases are also a sign of less than robust demand in the economy.

Fears of continued low inflation could lead the ECB to extend its stimulus program, in which it buys bonds from banks using newly printed money. The bond purchases are slated to run at least through September 2016, but the ECB has indicated it could decide to expand that program or deploy a different form of stimulus at its December meeting.

The 1.1 trillion euro ($1.2 trillion) stimulus program in essence prints new money — something only the central bank can do — and pushes it into the financial system through banks in the hopes that they will lend more and help businesses expand and hire.

In theory, printing money should push up inflation, but price increases have been slow to respond. The annual rate remains well below the ECB’s goal of just under 2 per cent.

Even core inflation, which excludes volatile energy prices, rose to only 1.0 per cent in October from 0.9 per cent the month before.

Low inflation makes it harder for indebted companies and countries to reduce their burdens. It also complicates efforts by bailed-out members of the eurozone such as Greece to make their economies more competitive with European trade partners. And in the long term, it can become ingrained and undermine wages, investment and growth.

Analyst Howard Archer at IHS Global Insight said that “it looks like being a long and arduous slog before eurozone consumer price inflation gets up near the ECB’s target rate…Indeed it looks increasingly unlikely to happen before 2018.

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