...with my little eye something beginning with 2. No, not inflation.  Photographer: Simon Dawson/Bloomberg
...with my little eye something beginning with 2. No, not inflation.  Photographer: Simon Dawson/Bloomberg

Back in March, European Central Bank Governing Council member Jens Weidmann said that the "deceleration of prices" seen in the euro region was a temporary phenomenon caused by a drop in energy and food prices. What sounded unlikely then now looks myopic, misinterpreted or disingenuous, depending on how charitable you're feeling.

Figures today show Spanish consumer prices dropped at an annual pace of 0.3 percent this month. Inflation there has been below 1 percent for a year. If the technical definition of a recession is two consecutive quarters of shrinking gross domestic product, it seems fair to suggest that a further slowdown in Spanish prices next month would put the country in deflation.

Moreover, prices are dropping even though growth figures also released today show the economy expanded by 0.6 percent in the second quarter, beating the 0.5 percent anticipated by the Spanish central bank. All of which bodes badly for the ECB's efforts to avert deflation in the euro area.

Here's a chart that combines what euro region prices have done in recent years with the consensus forecast of economists surveyed by Bloomberg News for where inflation is headed:

Note that the blue line shows no signs of reaching the 2 percent level that would signal inflation at the pace that the ECB judges to be economically desirable. And, if you parse the signals emanating from the European bond market, where 10-year borrowing costs for Germany, France and Spain all dropped to record lows this week, it seems likely that economists are more likely to be cutting their inflation forecasts than increasing them:

It's been two long years since ECB President Mario Draghi's promise to do "whatever it takes" to safeguard the euro project. Words, though, are not enough to make companies sufficiently confident about the economic outlook to invest, expand and raise prices, which in turn would enable them to hire more workers and pay higher wages. Draghi needs to make good on his pledge to remove the blockages that are preventing central bank financial largesse from making its way off the ruptured balance sheets of the banking system and into the real economy.

To contact the author of this article: Mark Gilbert at magilbert@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.