The annual rate of inflation in the Eurozone dropped unexpectedly from 0.5% to 0.4% in June – the lowest rate in almost five years.

The drop was caused by sharp falls in food, alcohol and tobacco prices. Energy prices also fell sharply, by 1%.

Economists had expected the annual rate to remain unchanged at 0.5%.

This unexpected change has led some experts to suggest that the Eurozone could be edging towards a dangerous deflationary spiral.

Peter Vanden Houte, chief Eurozone economist at ING, said:

“July’s figures don’t give any assurance that the Eurozone is already out of the deflation danger zone. Moreover, with the escalating conflict with Russia dampening growth prospects, it seems unlikely that deflation fears will disappear any time soon.”

Deflation is dangerous for growth because it encourages businesses and consumers to put off domestic spending, in the hope that prices will drop further still.

The European Central Bank has already taken action once to avoid deflation. cutting the interest rate to a record low of 0.15%, and offering a £317 billion package of cheap funding for banks.

Mr Vanden Houte said that the ECB were unlikely to announce further measures, for now.

He said:

“The bank has already given the message that it wants to evaluate first the impact of earlier announced measures, before contemplating additional action. This all but excludes new measures… for the remainder of this year.”

Image by Giampaolo Squarcina