Euro Zone Consumer Prices to Shrink Again, Boosting Deflation Fears

A preliminary estimate of the [B]Euro Zone Consumer Price Index[/B] is expected to show that inflation fell at an annual pace of -0.3% in August, a slight improvement over the -0.7% result registered in the previous month. Still, the bottom line is that prices are set to decline for the third consecutive month, contributing to building expectations of lower prices in the future. This threatens to unleash a deflationary spiral that sees consumers and businesses perpetually hold off on spending and investment as they wait for the best possible bargain, bringing economic growth to a virtual standstill. At this point, a survey of economists polled by Bloomberg suggests the market sees CPI shrinking through the third quarter and returning to a path of positive growth by the end of the year. If this proves to be too rosy, traders may punish the Euro as it becomes clear that the currency bloc is heading for a long-term period of low interest rates and sub-par economic growth. A disappointing outcome seems likely considering the European Central Bank’s apparent inability to offer effective monetary easing as well as well-founded reservations about the sustainability of the upswing in economic growth seen in the second quarter.