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Euro zone inflation drops to a five-year low

Euro zone inflation dropped to a fresh five-year low in August, something likely to concern the European Central Bank but not force it into immediate policy action.

Consumer prices in the 18 countries using the euro rose by just 0.3pc year-on-year in August, the smallest increase since October 2009, the European Union's statistics office Eurostat said. The number matched market expectations.

The ECB targets an inflation rate at below-but-close to 2 percent over the medium term, a level not seen since the first quarter of 2013. It also considers anything below 1 percent over time to be in a "danger zone".

Inflation moving ever closer toward zero, a stagnating economy, a double-digit unemployment rate and increasing signs of reform fatigue among euro zone governments are posing a tough challenge for the ECB that it says it cannot solve alone.

"This is yet another bad indicator of the health of the euro zone economy," said Aberdeen Asset Management Investment Manager Luke Bartholomew. "We are now relying on Draghi the politician not Draghi the economist to get Europe out of this mess."

"He is walking a tightrope between conservative European institutions and the markets desire for more stimulus. But as every month passes we get closer to the dread of deflation and Draghi looks more and more like Nero fiddling while Rome burns."

The euro rose to the day's high of $1.3195 EUR= as investors trimmed bets against the currency after the data and German Bund futures fell.

The drop in August inflation was led by a 2.0-percent decline in the highly volatile prices of energy. Prices of food, alcohol and tobacco fell by 0.3 percent for a second month in a row in August. Core inflation, which strips out such volatile components, rose to 0.9 percent from 0.8 percent.

"Core inflation resilience at just below 1 percent confirms that outright deflation remains unlikely," said Marco Valli, chief euro zone economist at UniCredit.

In a separate data release Eurostat said that unemployment in the euro zone was, as expected unchanged at 11.5 percent for a second months in a row in July, leaving 18.4 million people without jobs in the 9.6 trillion euro economy.

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