Euro Zone Edges Closer To Deflation

  • Posted Thursday, July 31, 2014 at 08:21 PM

TANGIBLE INVESTMENTS - Los Angeles - by James O'Dell - Gold and Silver prices retreated sharply on Thursday, as the dollar hit 10-1/2 month highs, while Gold dipped $12.15 or 0.94 percent to trade at $1,283.10 an ounce, and Silver eased $0.21 or 1.02 percent to $20.42 an ounce after the Dow plunged more than 200 points when investors were spooked that Argentina defaulted on its debt.
 
Also roiling markets is a report that the inflation rate in the euro zone slid again in July hitting its lowest since October 2009, and adding pressure to the European Central Bank (ECB) to boost the economy. The European Union's statistical agency, Eurostat, said inflation fell to 0.4 percent from June's reading of 0.5 percent. Low inflation is troubling because it leads to deflation and a condition where constantly falling prices prohibit growth. Escaping from the grip of deflation can take decades...case in point...Japan.
 
"The ECB has more work to do to tackle the risk of deflation," said Jonathan Loynes of Capital Economics. Economist Howard Archer, of IHS, says the fall in the overall rate of inflation can be attributed, in part, to a fall in energy prices, which can be volatile. The core inflation rate did in fact remain unchanged for the month at 0.8 percent, but the news was still "a blow for the ECB," since the economy remains sluggish, it's unlikely that inflation will rise anytime soon.
 
"There is undeniably a very real risk that euro zone consumer price inflation could go lower still ... barring an appreciable rise in oil and gas prices resulting from geopolitical factors hitting supplies," said Archer, as he made reference to Russia, a major oil and gas supplier for Europe. Analysts say the next step would be for the ECB to launch an asset purchase program similar to the Fed's quantitative easing (QE) program, which it is now in the process of unwinding.
 
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