The economic downturn, which hit world economies last year, is still having a negative impact on prices; pushing them to the downside and raising concerns regarding deflation risks. Nevertheless, the inflation rate in the euro zone witnessed improvements in August, after recording its sharpest fall in at least 13 years in July, as a consequence of the decline in energy costs and rising unemployment levels, which had reached its highest in 10 years.
Improvement has started to take place; starting from the second quarter, although the general price level remains low. However, recently, prices have started to increase with the stimulus plans used by the ECB. In Germany, the largest economy in the euro area had its annual rate of inflation in August climbing to zero and remaining at that level in September, as shown by the advanced reading.
The enormous economy is showing ongoing improvement and is leading the recovery in the euro zone. In the second quarter, the euro zone's GDP showed a slowdown in contraction to 0.1% from 2.5% in the first quarter, thanks to the unexpected 0.3% expansion recorded in Germany and France. This expansion is expected to push prices upwards to positive areas again, since the recovery will spur demand on commodities, especially oil.
Today, Germany will release its CPI preliminary reading for September, with expectations of a decline to -0.1% from 0.0%. On the month, the reading is estimated to incline to 0.2% from -0.2%. Also, EU Harmonized reading will be released and expected to rise to 0.3% from -0.2% on the month and to surge to -0.1% from -0.2% on the year.
Prices in August were buoyed by higher clothing and travel prices, which offset the decline in energy and food prices. Energy prices retreated in September, compared with August where prices hit 10 month high. Oil prices fell on the annual basis near 40%, but it managed to more than double since reaching its lowest in February. Analysts expect the continuing progress towards recovery, oil prices might further advance; meaning higher inflation rates in the upcoming period.
Moreover, the stimulus packages introduced by the German government and ECB are expected to raise inflation. Angel Merkel announced an 85 billion euros plan to revive growth, while the ECB, on the flip side, cut the benchmark to a historical low of 1% and launched a 60 billion euros plan to be spent on purchasing covered bonds to support markets with liquidity.
The European Central Bank, during their last meeting, raised inflation forecasts for the euro area to 0.4% this year and 1.2% next year; above the 0.3% and 1% respectively announced in June. However, The Bank has warned previously, that the recovery may face hardships, such as the escalating jobless rate which is crippling spending and thereby putting a downside pressure on prices.
Companies are shedding jobs to cut their expenses, in order to either stave off bankruptcy or return to profitability. Jobless rate in the euro zone is currently 9.5%, the highest since September 1999; in Germany the rate is 8.3%, which means that the labor sector is still adversely impacted by the recession; the thing that may affect prices and moderate its rise.
Hence, prices are facing downside pressure on the one hand, due to the rising unemployment and the decline in oil prices, while it is gaining upside support from improvement and increase in growth. Thus, prices may fluctuate in the upcoming period, till the economy shows strong signs of recovery and proves that it is capable to strive without any stimulus.