Deflation risk raises head again in Europe

March 31, 2014: 9:15 AM ET
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LONDON (CNNMoney)

Price pressures in the eurozone continued their four-month slide in March, sparking renewed talk about the risk of deflation and central bank action to spur the economy.

The annual rate of inflation fell to 0.5%, down from 0.7% in February and weaker than most economists were expecting. Inflation is now at its lowest level since November 2009.

The European Central Bank, which meets Thursday, targets inflation of just below 2% in the medium term, and the bank doesn't expect it to come close to that until late 2016.

The European economy is not generating jobs fast enough to bring unemployment down from record levels, and activity is not yet robust enough to remove the risk of deflation.

Related: ECB holds fire despite deflation risk

"It is looking an ever closer call on whether the ECB will take further measures, and it is very possible that the bank could act as soon as its April 3 policy meeting," said IHS Chief Economist Howard Archer.

Prices are now falling in five eurozone countries. But ECB President Mario Draghi and other officials have said they see no evidence of deflation across the region as a whole.

Still, they have warned of the risks of an extended period of low inflation and have said that the strength of the euro at around $1.40 is contributing to pressure on prices.

The March number was depressed by slowing food price inflation, and a big fall in energy costs, both factors over which the ECB has little control -- and the bank is likely to pay greater attention to the strength of the currency, Archer said.

A late Easter holiday this year -- in April rather than March -- may also have had a dampening effect as retailers and travel operators wait for next month to introduce seasonal price increases.

A slide into deflation could depress economic activity still further as spending is postponed in anticipation of lower prices. It would also raise the real value of the debt already weighing down on many eurozone countries.

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