Price fall slows in Europe

Prices in the 16 nation bloc fell 0.2 percent this month, a far less drop compared to 0.7 percent drop in July.

“It’s certainly a shorter period of negative inflation rates than most people thought and could be over next month,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “This latest piece of data puts the final nail in the coffin of the idea that the ECB will do more. At the same time, they don’t really have to worry about inflation pressures until 2011 or 2012.”

Negative inflation due to fall in oil prices
The inflation in Europe has dragged down due to fall in price of energy and other commodities due to fall in demand by both industries and households.

Inflation in the euro zone had risen to 4.1 percent last July when oil had reached a record high of $147 a barrel. Currently the price of oil has fallen to $70 a barrel, thus leading to a fall in inflation.

The fall in prices in August is "clearly primarily due to oil prices falling at a significantly reduced rate year-on-year," said Howard Archer, chief European economist at IHS Global Insight.

The European Central Bank (ECB) has affirmed that the disinflation is short-lived and will not lead to deflation - a downward spiral leading to vicious circle of fall in demand, rising unemployment etc.

Cautious about future
Though sales are picking up and companies are expecting more orders and higher output, the ECB is cautious about future.

In order to keep the inflation under 2 percent, the ECB has cut the interest rate to a record level of 1 percent and started buying bonds to prevent financial markets from freezing.

“The recovery is still early and fragile,” Erik Nielsen, chief European economist at Goldman Sachs Group Inc., said before today’s report. “It is therefore important for the ECB to keep the foot on the accelerator in terms of stimulus.”