Eurozone inflation remains negative - Data fuel fears of deflationary phase

Eurozone inflation remains negative - Data fuel fears of deflationary phase
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2009
Published: July 31 2009 11:03 | Last updated: July 31 2009 11:03
http://www.ft.com/cms/s/0/8d56bac6-7db5-11de-8f8d-00144feabdc0.html


Eurozone inflation has plunged further into negative territory, with consumer prices in July down 0.6 per cent compared with a year before.

The larger-than-expected fall in the annual inflation rate could stoke fears of a damaging deflationary phase in the 16-country bloc, even though the European Central Bank believes the rate will soon turn positive again.

In June, annual inflation was minus 0.1 per cent, which was already the lowest since comparable records began in 1991 and probably the lowest in continental Europe since the early 1950s.

Inflation has fallen largely because of lower energy costs, but evidence is mounting that price falls have become more general as a result of the severe recession in the region. Eurozone consumers are also increasingly expecting prices to fall in the year ahead.

Earlier this month the ECB warned that inflation would remain negative “over the coming months, before turning positive again” but argued that “such short-term movements are not relevant from a monetary policy perspective”.

The ECB expects inflation to rebound as the effects of steep falls in oil prices drop out of year-on-year comparisons. It is widely-expected to keep its main interest rate unchanged at 1 per cent when its governing council meets next week.

But the risk for the central bank is that negative inflation rates fuel fears of a protracted period of general price declines, which would compound the region’s economic problems.

Earlier this week Marek Belka, director of the International Monetary Fund’s European department, said the risk of deflation remained minimal, but “we should be vigilant and we should not completely exclude the possibility”.

Underscoring the weakness of the eurozone economy, the region’s unemployment rate edged up to 9.4 per cent in June, the highest for ten years, according to Eurostat, the European Union’s statistical office. In May the rate had been 9.3 per cent.