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Inflation falls to 0.3 per cent in countries that use euro; pressure is on central bank to act

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FRANKFURT - Inflation in the 18 countries that use the euro sank to an annual 0.3 per cent in August, a sign of economic weakness that is putting pressure on the European Central Bank to take drastic steps to save a stalling recovery.

The figure was down from 0.4 per cent in July, the EU statistics agency said Friday, and is the lowest since October 2009. Back then the eurozone was deep in recession after the collapse of U.S. investment bank Lehman Brothers threw global markets into a tailspin.

Italy, the eurozone's third-largest economy, said it is seeing deflation for the first time since 1959, with prices dropping 0.1 per cent in the year to August.

The figures heighten concern over the health of the modest recovery in Europe's currency union, a major pillar of the global economy with some 17 per cent of world output. The eurozone showed no growth at all in the second quarter as fears about the Ukrainian crisis weighed on consumers and investment decisions. Unemployment remained high at 11.5 per cent in July, unchanged from the month before.

Core inflation, which excludes volatile food and energy, sent only a modestly brighter signal as it rose to 0.9 per cent from 0.8 per cent.

ECB President Mario Draghi has warned that inflation expectations are worsening and says the bank will add more stimulus if needed.

Many analysts predict the ECB will eventually launch large-scale purchases of financial assets to pump more money into the economy. The bank's governing council meets on Thursday, but experts generally think it will hold off for several more months as it waits to assess the impact of earlier stimulus efforts.

The bank has already taken steps to boost growth and prices, cutting its key interest rate in June to 0.15 per cent and offering cheap loans to banks on condition they lend more to companies.

Consumers like low inflation because it makes their paychecks go further in stores. But it is a sign of overall weak demand. And it has been so low for so long that it has raised fears of deflation, a crippling downward price spiral that comes about when people hold off buying things because they think prices will fall further.

Europe's economy grew for four quarters but then the recovery came to a halt in the second quarter of this year as core economies France and Germany stalled. Most economists predict growth will resume in coming quarters but it is feared that uncertainty over the crises in Ukraine and the Middle East will keep the recovery too weak to reduce high unemployment.

Draghi has said that if needed the bank could make large-scale purchases of financial assets, known as quantitative easing, or QE. That step adds newly created money to the economy and in theory can lower longer term borrowing costs for companies and increase the rate of inflation.

"Today's data should provide fresh fuel for speculation about broad-based bond purchases (QE) by the ECB," wrote analyst Christoph Weil at Commerzbank. "We now put the probability of QE at 60 per cent."

By considering more stimulus, the ECB is leaning in the opposite direction from that of the U.S. Federal Reserve, which is expected to halt its asset purchases later this year as the U.S. economy grows more strongly.

___

Frances D'Emilio in Rome contributed to this report.

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