CONSUMER PRICES in the euro zone fell by less than expected in August as the European economy recovered from its deepest slump since the 1940s, but a leading policymaker said the European Central Bank (ECB) would not rush to reverse recent stimulus measures designed to support the economy.

Prices in the 16-member euro region fell 0.2 per cent on an annual basis in August after declining by a record 0.7 per cent in July, the EU statistics office in Luxembourg said.

The smaller-than-expected drop in prices prompted speculation that the euro zone’s period of deflation may prove to be short-lived. A rise in the cost of oil and other commodities, and stimulus measures such as the ECB’s €60 billion bond-buying programme could drive up prices by more than desired and force the ECB’s governing council to increase interest rates to stabilise prices.

However, governing council member Ewald Nowotny, who is the head of Austria’s central bank, said yesterday he expected the ECB would be careful not to make any moves that would run the risk of a double-dip recession.

“I don’t see a perspective of a W-shaped recession if there’s no premature exit strategy,” Mr Nowotny said. “What I see is the danger that we’ll have very low rates of positive growth for some time.”

The ECB has cut its key lending rate to a record low of 1 per cent and is providing banks with as much cash as they want in a bid to revive lending and spark growth.

The euro zone’s two largest economies, Germany and France, exited recession in the second quarter. However, rising unemployment is expected to limit consumer spending and keep prices subdued.

Mr Nowotny said the ECB did not have to worry about inflation for the time being. “We have a clear mandate to fight potential inflation. But I also see that this is really not an immediate concern.”

Consumer prices in Ireland have fallen faster in recent months than elsewhere in the euro zone.

Irish inflation data for August is due next week. – (Additional reporting: Bloomberg)