Deflation Peril May Hinder Euro Recovery

Eurozone inflation has been below ECB targets for nine months; analysts speculate ECB might further cut record-low interest rates.

Mario Draghi is facing down a deflation threat with few options left to fight it.

Consumer prices in the euro area are rising at the slowest pace in four years, well below the European Central Bank’s (ECB's) target of just under 2 percent. The ECB president has a choice of cutting rates that are already near zero, injecting liquidity that may not boost prices, or ignoring the ECB’s own definition of price stability, according to banks including JPMorgan Chase & Co. and BNP Paribas SA.

Draghi may simply wait for the nascent euro-area recovery to lead to an acceleration in price gains. Business confidence as measured by the European Commission increased for a sixth month in October to the highest level in more than two years, while manufacturing and services output has expanded since July, signaling the recovery in the euro area is gaining strength.

Low inflation may even help growth, according to Christoph Weil, an analyst at Commerzbank AG in Frankfurt. Periphery nations are cutting labor costs as they strive to reduce a euro-region unemployment rate that stood at 12.2 percent in September.

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