Eurozone Deflation Threat
August 13th, 2009
Eurozone inflation has fallen deeper into negative territory, according to official data that suggests risks of deflation remain in spite of the region’s improved growth prospects.
Consumer prices in the 16-country zone were 0.6 per cent lower in July than a year before, according to Eurostat, the European Union’s statistical office. In June, the annual inflation rate was minus 0.1 per cent, which was already the lowest since comparable records began in 1991.
The latest, larger-than-expected fall in inflation reflected largely the impact of volatile energy prices over the past year. But it could stoke fears of a protracted deflationary period, in which prices fall generally.
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”.
The European Central Bank has repeatedly warned that negative inflation rates were likely for some months but expects a return to a positive annual inflation rate later this year. Last month it argued that “such short-term movements are not relevant from a monetary policy perspective”. The ECB is widely expected to keep its main interest rate unchanged at a record low of 1 per cent at its governing council next week.
The eurozone economy has shown clear signs of stabilising in recent weeks, although its recovery appears less advanced than in the US or UK. Separate Eurostat figures on Friday showed eurozone unemployment had risen to a 10-year high of 9.4 per cent of the workforce in June, up from 9.3 per cent in May. But the increase was less than feared.
Analysts agreed that eurozone annual inflation rates had probably reached a trough in July, with a return to positive rates likely by November as the effects of large falls in oil prices drop out of year-on-year comparisons. But evidence is mounting that price falls are becoming more general. Julian Callow, European economist at Barclays Capital, argued the ECB should launch an offensive to prevent deflationary fears taking root.
“Core” inflation, which excludes energy and food prices, has already turned negative in Ireland. A European Commission survey this week showed consumers’ expectations about prices in the next year were more skewed towards expecting falls than at any time since its surveys started in 1985.
But Nick Kounis at Fortis Bank argued the risks of deflation related more to the medium term, given the high level of slack in European economies. In contrast, the current dip would soon be reversed. “It is difficult to get worried about this period of negative year-on-year changes,” he said.
Story from Financial Times
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