By Emese Bartha And Brian Blackstone
FRANKFURT--German inflation stabilized at a very low rate in
August while Spanish consumer prices fell at an accelerated pace,
putting added pressure on the European Central Bank to take
dramatic steps to prevent ultralow inflation from further damaging
the euro zone's stagnant economy.
The national reports, including one from Belgium showing flat
prices, came one day ahead of euro-zone-wide figures, due Friday.
Thursday's figures suggested annual euro-zone inflation will weaken
from 0.4% in July to 0.3% in August, a fresh five-year low and well
below the ECB's target of just below 2%.
Separate reports showing a drop in business and consumer
confidence in the euro zone--as well as a slight uptick in German
unemployment--underscored the fragility of the world's
second-largest economic region and signaled that after stalling in
the second quarter, the economy will struggle to expand much this
quarter.
Germany's statistics office said annual inflation in Europe's
largest economy was 0.8% in August, unchanged from July's reading.
Prices were flat compared with last month. The August reading was
driven by a sharp decline in energy prices, which were offset by a
slight rise in food inflation and an increase in services
prices.
Low German inflation makes it harder for struggling economies in
southern Europe to rebalance their economies. In order for Spain,
Portugal and others to become more competitive, they need to have
inflation rates below that of Germany.
If Germany's inflation rate were 2% or higher, they could do
this with lower, but positive, rates of inflation. With German
consumer prices growing so slowly, however, countries in southern
Europe must run superlow, or even negative, rates of inflation to
restore competitiveness. That raises the risk of a deflationary
spiral that threatens consumer and business spending while making
it harder for companies and governments to service debts.
Spain's rate has turned negative, a trend that intensified in
August. Consumer prices shrank 0.5% from last year, the country's
statistics office said, compared with a 0.3% drop in July.
Deflationary forces are starting to threaten healthier economies in
Northern Europe, too. Belgium reported Thursday that its inflation
rate softened to 0.02%, a nearly five-year low.
The reports came days after ECB President Mario Draghi warned
that low inflation may be gaining a foothold in Europe because
financial markets are reducing their expectations for future
consumer-price growth. "Over the month of August financial markets
have indicated that inflation expectations exhibited significant
declines at all horizons."
The ECB "will acknowledge these developments and within its
mandate will use all the available instruments needed to ensure
price stability over the medium term," he said. The ECB meets next
on Sept. 4.
Mr. Draghi's emphasis on inflation expectations--which are
central to the medium-term price outlook--opened the door wider to
large-scale purchases of public and private debt by the ECB, known
as quantitative easing, analysts said. The euro has weakened on
expectations of more ECB stimulus.
Still, many economists expect the ECB to wait and see how other
stimulus measures pan out before embarking on quantitative easing,
which is deeply unpopular in Germany. In June, the ECB reduced
rates to record lows and unveiled a four-year lending program for
banks. The first installment will be next month.
Economists at Nomura and J.P. Morgan Chase expect the ECB to
lower their key interest rates further at next week's meeting.
Separate reports Thursday suggest the euro-zone economy needs
the boost after stalling last quarter. The European Commission's
economic sentiment index, which covers companies and consumers,
fell to 100.6 in August from 102.1 a month earlier. A separate
index measure consumers' inflation expectations weakened too,
mirroring trends in financial market gauges.
German unemployment unexpectedly rose in August. But the
increase was small and the unemployment rate remained near record
lows.
Christopher Bjork contributed to this article.
Write to Emese Bartha at emese.bartha@wsj.com