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Euro zone inflation falls again ahead of Draghi decision

Will euro zone inflation pick up before year-end?

Consumer price growth in the euro zone slipped again in September, according to official data released on Tuesday, piling yet more pressure on policymakers at the European Central Bank (ECB).

The flash figure for the 18 nations that share the single currency came in at 0.3 percent this month compared to the same period the year before, meeting estimates in a Reuters poll but falling below August's reading of 0.4 percent. It marked the worst reading since October 2009 when - after the global financial crash of 2008 - consumer prices in the euro zone posted negative growth.

The euro fell sharply against the dollar on the news, hitting 1.2627 after closing at 1.2684 in Monday's session. The euro hit a new two-year low against the greenback and a 26-month low against sterling.

The latest number comes after a summer marred by concern that the region is slipping into a period of stagnation after posting signs of flickering growth in late 2013. There have also been fears of deflation - when consumer prices fall as shoppers hold off purchases in anticipation of further reductions.

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Price reductions in Berlin, Germany
Sean Gallup | Getty Images

ECB President Mario Draghi has been busy cutting interest rates and giving out cheap loans to euro zone banks. In early September he unveiled a slew of stimulus measures which effectively added 1 trillion euros ($1.29 trillion) to the euro zone's flagging economy, according to some analysts. Draghi is still pondering whether to launch a Federal Reserve-style government bond purchase program and some analysts - including those at Barclays - believe this is now the base case scenario.

Draghi is back in front of the media's glare this Thursday when the Governing Council meets for its latest policy decision and press conference.

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A Fed-style package could prove to be a controversial move. This is primarily because there are no common euro zone bonds and, technically, the ECB can't invest in an individual country at the expense of another. Germany, as the largest euro zone country, would likely be the recipient of the largest amount of ECB cash which could dangerously stoke inflation and would be at the expense of some of the smaller, struggling nations. Germany has expressed concerns about the purchasing of government bonds from countries with comparably poor financial discipline.

Meanwhile separate figures released on Tuesday confirmed euro zone unemployment in August at 11.5 percent.

Howard Archer, chief European economist at IHS Global Insight, said the two data points provided mixed news about the strength of the euro zone economy.

"The further dip in euro zone consumer price inflation in September will clearly be of serious concern to the ECB as it keeps the deflation specter in sight, especially given current stuttering euro zone economic activity and weak oil prices," he said in a note on Tuesday.

However, Archer said the 137,000 drop in unemployment in August indicated that the slight improvement in the region's labor markets was continuing.

"Nevertheless, there is the very real worry that recent stuttering euro zone economic activity and a general relapse in business confidence amid heightened geopolitical tensions will increasingly weigh down on companies' employment plans and cause the limited improvement in euro zone labor markets to grind to a halt," he added.

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