Friday May 29, 02:49 PM
Eurozone inflation hits zero
BRUSSELS (AFP) - Record (LSE: REC.L - news) low price inflation data for May on Friday put the 16-nation eurozone economy at risk of falling prices, adding to pressure on consumption as the worst recession since the 1930s saps demand.
Eurostat figures showed the May inflation rate on a 12-month basis at zero, down sharply from April's then-record low of 0.6 percent.
Economists said it seems inevitable that the eurozone economy will fall into a period when prices actually fall, a worrying development since it means consumers may put off purchases in the hope of buying more cheaply later.
If that process of deflation becomes established, it can undercut production and so employment, in turn setting up a vicious circle of ever decreasing economic activity just when the region is already deep in recession.
Several countries are already seeing negative figures -- Spain where prices fell 0.8 percent in May for a third consecutive drop, with Belgium a negative 0.37 percent, the first such outcome since 1960.
After hitting a record high of 4.0 percent in June and July 2008, eurozone inflation has fallen sharply as oil and other commodity prices have collapsed in the face of the economic downturn.
Howard Archer of Global Insight said it seemed inevitable that the eurozone would see a negative figure for June and for several months thereafter, if only because of a skewed comparison with very high energy prices in June 2008.
Ben May of Capital Economics said he too expected a deflation reading for June while the chances that prices would fall for a longer period was increasing.
Officials put a different spin on the figures, suggesting that low prices would be welcomed by consumers, especially those on low incomes.
European Commission spokeswoman on economic affairs, Amelia Torres, said on Friday that stagnant or falling prices would "be welcomed by households with low incomes" given the current problems in the economy.
For the moment, senior officials believe that while there may be a short period of deflation, it will not prove a lasting problem, fading away on its own as the economy recovers later this year.
They cite growing signs of a pick-up in demand, reflected in rising oil prices, suggesting the economy should return to growth late this year or early next.
Jean-Claude Trichet, head of the European Central Bank whose main task is to control inflation, said earlier this month that prices would begin rising again later this year after likely falling in the middle months of 2009.
The slide in prices "should be temporary," Torres said on Friday.
Other data Friday, however, showed that growth in the eurozone money supply fell in April, pointing to weakening demand and lower inflation still.
Growth in the ECB's M3 money supply indicator was 4.9 percent, down from a revised 5.0 percent in March, while lending to the private sector in April fell to a 2.4 percent rate from 3.2 percent in March.
"Today's data revealed that there was no let-up in the downward trend in both broad money and lending growth in the eurozone," Capital Economics European economist Daniele Antonucci commented.
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