World Economy

Euro zone exits deflation; pressure still on Draghi


Euro zone inflation flatlined in October, according to a flash estimate on Friday from Eurostat, the statistical office of the European Union.

The 19-country euro area posted no gains in prices on average this month, year-on-year. This was as forecast and follows a 0.1 percent decline in September.

Price reductions in Berlin, Germany
Sean Gallup | Getty Images

The figure is still a far cry from the target of "close to" 2 percent set by the European Central Bank and may provide further impetus for the bank to extend the duration of its 1 trillion euro ($1.1 trillion) monetary stimulus program or broaden the scope of the assets that can be purchased under the plan.

The slump in energy prices continued to pressure inflation lower in the euro zone. Energy prices fell by 8.7 percent in October in the area, building on declines of 8.9 percent last month.

In comparison, food, alcohol and tobacco prices rose by an average of 1.5 percent and non-energy industrial good prices rose by 0.4 percent this month.

Euro zone inflation

Furthermore, house prices rose by 1.1 percent in the euro area between April and June, according to Eurostat. UBS reported on Thursday that house prices in all major European cities, including Amsterdam, Frankfurt and Paris in the euro zone, were now overvalued.

The next ECB Governing Council meeting is in December in Frankfurt, when it is widely expected to announce further monetary stimulus measures.

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"Overall, we think inflation will increase steadily into the first quarter of next year, quicker than both the ECB and market expects. Inflation pressures will remain overall weak, though, and the central bank will likely retain its dovish stance," said Pantheon Macroeconomics in a research note after the inflation data was out.

"We don't think the data will prevent the governing council from announcing additional QE and a deposit cut rate at its December meeting."

Unemployment near 4-year low

Euro area unemployment came in at 10.8 percent in September, narrowly down from 10.9 percent in August 2015 and down from 11.5 percent in September 2014, Eurostat also reported on Friday.

September 2015's figure is the lowest unemployment rate recorded in nearly four years, according to Eurostat.

Euro zone unemployment

However, the 19-country average disguises some stark differences between member countries. Unemployment rates recorded in September varied between 4.5 percent in Germany and 21.6 percent in Spain. Greece posted unemployment of 25.0 percent in July, the last month for which data is available for the country.

This compared with seasonally adjusted unemployment of 5.3 percent in the U.K. in July and 5.1 percent in the U.S. in September.

The pan-European STOXX Europe 600 slipped into the red after the data was out, while the euro continued to trade at around $1.10.

— By CNBC's Katy Barnato. Follow her on Twitter @KatyBarnato.