Europe Economy

Euro zone inflation falls again amid deflation fears

Euro zone inflation fell more than expected in July, according to new figures released on Thursday, sparking renewed fears that the region could be heading for a period of deflation.

Official flash figures showed that inflation rose by 0.4 percent compared to the same period last year, failing to match expectations of 0.5 percent in a Reuters poll. It is the lowest level seen since October 2009 and below last month's reading of 0.5 percent. Energy prices were the biggest drag on the figures, according to the estimates, with the cost of food, alcohol and tobacco also slipping in July.

edestrians carry shopping bags while walking in the Harlem neighborhood of New York.
Craig Varga | Bloomberg | Getty Images

The euro zone data follow some disappointing figures on Wednesday, which saw Spain slide into deflation - where the growth in consumer prices turns negative and begins to fall. Germany - considered to be the powerhouse of the region - saw its rate of inflation slow to 0.8 percent, following on from last month's reading of 1.0 percent.

Analysts at BNP Paribas called the flash reading a "new cyclical low" and said they expected it to remain around current levels over the next couple of months, with risks tilted to the downside.

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The European Central Bank (ECB) sees inflation as a key metric in gauging the state of the euro zone, and announced a slew of measures back in June to try to spur on the region's flagging economy. Many analysts fear deflation could lead to a downward spiral, with consumers holding off on purchases in the expectation that prices could fall further. Others see deflation as a natural rebalancing within the region, believing that consumer prices need to slide to counterbalance an overly-strong euro.

Mario Greco, CEO of Italian insurance company Generali, told CNBC on Thursday that the euro zone is "probably" already in state of deflation.

"The European situation is quite concerning," he said. "I mean the labor situation in all of Europe, you know, is not moving. It's not moving good at all."

Read MoreEuro zone business activity rebounds, France lags

Some have accused the ECB of acting too late to tackle the risk of deflation, with most of its stimulus measures not expected to kick in until later this year and little chance of the central bank announcing new measures in the meantime.

Inflation: US/Europe divergence 'pretty clear'
Inflation: US/Europe divergence 'pretty clear'

Daniel Tenengauzer from RBC Capital Markets backed this view, telling CNBC that there was now a clear divergence between the data coming out of Europe and that from the U.S. "It will take some time before policy makers in Europe actually take another step," he said.

The next few months will increase pressure on ECB President Mario Draghi, according to AvaTrade Chief Market Analyst Naeem Aslam, who said it will be difficult for Draghi to fight the argument that they need more time to see the impact of new measures.

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Howard Archer, an economist at IHS Global Insight, added that there is a very real risk that euro zone consumer price inflation could go lower still. Although an appreciable rise in oil and gas prices resulting from geopolitical factors could prevent this, he said.

"We still expect the euro zone to avoid overall deflation," he said in a morning note. "The downward pressure on inflation coming from year-on-year falls in energy prices and sharp food price disinflation may well be drawing to a close."

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