Eurozone inflation negative for first time

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Eurozone inflation dipped into negative territory for the first time in June as consumer prices fell 0.1% year-on-year, slightly less than expected, data showed yesterday (30 June).

The flash estimate from the European Union’s statistics office, Eurostat, followed unchanged consumer prices in the 16-nation currency area in May. June marked the first month of negative inflation since the creation of the euro zone in 1999.

Costs have fallen because energy and food were more expensive a year ago and the worst economic crisis since World War Two has eroded firms’ pricing power, analysts said, playing down prospects for deflation or prolonged falls in prices.

“In the later part of the second half of this year, we will see a rising inflation rate, and the inflation rate will stay at 1% at the end of the year. So we have no deflation scenario,” said Christoph Weil, an analyst at Commerzbank.

Economists polled by Reuters had expected inflation to be -0.2% in June.

Declining prices may help boost consumer demand, which is key to restoring economic growth, but policymakers will try to ensure expectations of lower prices do not become entrenched.

“The concern is that a period of negative inflation will put further downward pressure on households’ and businesses’ inflation expectations,” said Daniele Antonucci of Capital Economics.

ECB seen on hold

The Eurostat estimate gave no monthly figure or more detailed breakdown, which will be published in mid-July.

The inflation figure is unlikely to change analysts’ expectations that the European Central Bank will keep its main interest rate unchanged at 1% when it meets on Thursday.

The ECB wants annual price gains to be just below 2% over the medium term and to avoid deflation, which it defines as a prolonged and widespread decline in prices coupled with consumers’ expectations of further falls.

“The central bank is concerned that more aggressive easing now could risk […] too sharp an acceleration of inflation over the longer term,” said Nick Kounis, chief European economist at Fortis.

“So it is happy to allow some inflation undershoot over the next year or two to prevent overshooting – both in terms of financial bubbles and/or inflation – beyond that period.”

The ECB said consumer prices were likely to fall for a few months in the middle of the year due to comparison effects with record high oil and food costs a year before, adding that price growth would resume later.

UniCredit economists said they expected eurozone inflation to hit a trough in July at -0.4%.

Recent data showed inflation unexpectedly returned in Germany, with 0.1% growth in prices year-on-year in June after they stagnated in May.

In Spain, prices fell for the third consecutive month in June, by 1% year-on-year, slightly less than expected. Belgium’s inflation was -1.1%, the lowest since 1955.

(EURACTIV with Reuters.)

In January, Eurostat estimated that eurozone inflation was at 1.6%, under the official European Central Bank's (ECB) target of "below but close to 2%" (EURACTIV 07/01/09). Inflation had reached new records last year, hitting 4% in June (EURACTIV 1/08/08).

Concerned with the worsening economic crisis and falling inflation, the ECB decided to cut interest rates to new lows in moves aimed at easing lending and paving the way to recovery. Successive cuts were announced in January (EURACTIV 16/01/09) and March (EURACTIV 6/03/09). On 7 May, the ECB cut its main interest rate by 25 basis points to 1%, a new historic low.

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