Total inflation in the Eurozone dropped back below zero in September. However, although it makes for nice headlines, talk about deflation or additional stimulus from the ECB are off the mark. The renewed easing of inflation is entirely down to fluctuations in energy prices.
Total inflation in the Eurozone had been moving up from -0.6% in January to +0.3% in May, but has now slipped back below zero in September. This has triggered some speculation about additional stimulus by the ECB (like an increase in monthly bond purchases). However, this seems based on a misinterpretation of what is happening with inflation at the moment.
The recent moves in inflation have been driven mainly by fluctuations in oil prices, over which the ECB has no control whatsoever. Core inflation, which excludes the impact of fluctuations in energy and food prices, has been stable at about 0.9% for the past five months. This is still uncomfortably low, but not low enough to trigger additional monetary stimulus. Especially as the Eurozone economy is on track for a gradually strengthening recovery.
When energy prices stabilise, overall inflation will move back to about +1%. For now, the ECB is unlikely to react to what are essentially oil-driven fluctuations in inflation.