Inflation rate still negative in Eurozone as ECB policies having muted effect

 
Jake Cordell
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One euro will get you a tiny bit further today compared to last year, as inflation remains negative
One euro will get you a tiny bit further today compared to last year, as inflation remains negative (Source: Getty)

The Eurozone remained locked in deflation in May 2016, according to flash estimates released this morning by Eurostat.

Inflation, on the harmonised index of consumer prices (HICP) across the 19-member single currency union came in at minus 0.1 per cent, up slightly from minus 0.2 per cent in April.

The main index was dragged down by the sharp drop in the price of fuel compared to this month last year, with energy costs plummeting 8.1 per cent.

However, the core rate of inflation, which strips out the most volatile goods edged up from 0.7 per cent to 0.8 per cent, and the rate of inflation in every major category expect energy also picked up.

Read more: ECB tells Germany it won't be taking any more flak

This is now the fourth month in a row where prices have slipped in the Eurozone after it fell into deflation in February 2016.

The slight rise in prices will not be enough to satisfy the European Central Bank (ECB) according to analysts.

Joshua Mahony, market analyst at IG said: "Eurozone inflation remains within the doldrums. Despite the ECB embarking on a substantial round of easing, the fact that the Eurozone remains within deflation is a clear heads up that monetary policy alone cannot fix the problem of stagnant price growth."

Read more: Greece suffers latest setback as GDP slump worse than forecast

The ECB meets on Thursday for its next monetary policy decision. It is not expected to shift policy, especially since its latest instruments - the purchase of corporate bonds in the quantitative easing programme and the new targeted long-term refinancing options (TLTRO II) will only come into effect in June.

Early sings indicate that Mario Draghi's latest steps have had some of the desired effect, with figures out this morning showing that lending to businesses grew and banks are dropping their credit standards.

However, with inflation still in negative territory, unemployment remaining unchanged at 10.2 per cent this month and lending to households dipping, the path back to rising prices in the Eurozone looks rocky.

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