Deflationary pressures building

Deflationary pressures in the euro-zone economy are continuing to intensify. While April’s drop in CPI inflation to just 1.2% was partly down to energy and Easter timing effects, underlying price pressures are clearly fading in response to the ongoing weakness of economic activity in the region and the resulting build-up of spare capacity. The drop in inflation has increased the already strong pressure on the ECB to provide further policy stimulus. But such action is unlikely to revive the economy or prevent inflation from falling further over the coming months.