Deflation risks still mounting

May’s fall in euro-zone HICP inflation from 0.7% to 0.5% left it at its joint weakest rate since October 2009 and far beneath the ECB’s 2% price stability ceiling. There is no sign of inflationary pressure in the pipeline: there is plenty of spare capacity in the economy; producer price inflation was -1.2% in April; survey measures of inflation expectations have continued to fall; and the strong euro is weighing on import prices. Accordingly, the ECB is under pressure to provide bold policy support at tomorrow’s policy meeting to address the growing risks of deflation in the single currency area.