Paris (AFP) - The near paralysis of prices is raising fears the eurozone may tip back into a deflation -- a vicious circle of falling prices, wages and output -- and is raising pressure on the ECB to act.
Even the US Treasury expressed concern this week over the "deflationary bias for the euro area, as well as for the world economy,"
Data released by the European Union statistics agency Eurostat on Thursday showed the annual rate of inflation across the 17-country eurozone fell to 0.7 percent in October, the lowest for four years.
At first sight this would seem to be good news for households which have seen their purchasing power eroded.
It should be the opposite of inflation, in particular hyperinflation, in which rapidly rising prices wipe out the value of money that people hold.
But in reality the "perverse logic" of deflation means it will have a sharply negative impact on households, according to Philippe Waechter, an economist at Natixis Asset Management.
Once deflation sets in, consumers begin to delay purchases in the expectation that they will pay less tomorrow or next week for a computer or a car.
Slower sales has a knock-on effect on factory orders, and this can reduce production and either cut wages or jobs.
This leaves households in an even worse position and then often fearful to spend, worsening the cycle even further and creating a vicious circle that feeds upon itself.
Dominque Barbet, an economist at BNP Paribas, said that consumer prices were only "the tip of the iceberg" and one needs to look at wages, which are in free-fall in Greece, and sliding in a number of other southern eurozone countries such as Spain, and were stagnant elsewhere.
The fall in wages is now a crucial means of adjustment for eurozone countries as they can no longer devalue their currencies to boost activity and exports.
Often called an internal devaluation, lowering wages is one of the few options remaining to regain economic competitiveness, and crisis-struck eurozone states have been encouraged to pursue the method.
But eurozone adjustment is not the only factor fuelling disinflation, the process of slowing inflation which if it goes too far can become deflation.
With the current strength of the euro "we're importing deflation" as imported products are costing eurozone consumers less, noted Waechter.
Emerging market currencies tumbled by as much as 20 percent in August as investors anticipated the US Federal Reserve would begin reducing the amount of monetary stimulus it injects into the economy every month.
However the Fed has held off, leading the dollar to slide against the euro as well.
'A little like chickenpox'
"Deflation is a little like chickenpox," said Barbet.
"Suddenly you have negative or very weak inflation, everyone becomes alarmed. That is like when the pockmarks emerge, but the illness has been incubating for a while," he said.
Xavier Timbeau, director for analysis at the French Economic Observatory, said "the process of salary deflation is spreading" in Europe owing to austerity measures.
Eurozone states are cutting spending and undertaking labour market reforms to remove restrictions, both of which encourage wage restraint.
That "can be beneficial when there is growth, but is harmful in the current situation" of record unemployment in the eurozone, Barbet said.
The unemployment rate across the 17-country currency area hit a record 12.2 percent in September, with about 19.5 million people classed as jobless, according to separate data released by Eurostat on Thursday.
Pressure building on ECB to act
"Only a macroeconomic response" can help the eurozone avoid slipping into a deflationary spiral like the one that has plagued Japan for two decades, said Barbet.
In the absence of a coordinated budgetary policy across the eurozone, analysts and policymakers will be looking for the European Central Bank to step in.
Given the strength of the euro and the weak inflationary outlook "pressure looks set to build on the ECB to loosen monetary policy further," said economist Ben May at London-based Capital Economics.
Rising unemployment and slowing inflation give the ECB "ample room to support the economy with low interest rates and generous liquidity" said Christian Schulz, an economist at Berenberg bank.
"Chances of further policy action have increased with this release," he added.
The ECB has three tools at its disposal, according to economist Howard Archer at IHS research and analysis company.
The ECB could lower further its main interest rate from the already record low of 0.5 percent, which Archer said could come as soon as December.
It could also offer banks massive amounts of low-cost loans as it did at the end of 2011 and 2012.
Or ECB chief Mario Draghi could just try to change market perceptions and actions with words, as he did in the summer of 2012 when he calmed anxiety with his pledge to do "whatever it takes" to save the euro.
But analysts warn he should not wait too long to act."Once deflation takes hold, monetary policy doesn't have much leverage," said Barbet.