Tuesday June 30, 11:22 AM
UPDATE 1-Euro zone inflation negative for first time in June
By Marcin Grajewski
BRUSSELS, June 30 (Reuters) - Euro zone inflation dipped into negative territory for the first time in June as consumer prices fell 0.1 percent year-on-year, slightly less than expected, data showed on Tuesday.
The flash estimate from European Union statistics office Eurostat compared with 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 percent at the end of the year. So we have no deflation scenario,' said Christoph Weil, analyst at Commerzbank (Xetra: 803200 - news) .
Economists polled by Reuters had expected inflation to be -0.2 percent in June.
Declining prices may help boost consumer demand, which is key to restore 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 a 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 1.0 percent when it meets on Thursday.
The ECB wants annual price gains to be just below 2 percent 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 ... a too sharp acceleration of inflation over the longer term,' said Nick Kounis, chief European economist at Fortis (Amsterdam: FORAL.AS - news) .
'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 has said consumer prices were likely to fall for a few months in mid-year because of comparison effects with record high oil and food costs a year before, but that price growth would resume later.
UniCredit (Milan: UCG.MI - news) economists said they expected euro zone inflation to hit a trough in July at -0.4 percent.
Recent data showed inflation unexpectedly returned in Germany, with 0.1 percent 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 1.0 percent year-on-year, slightly less than expected. Belgium's inflation was -1.1 percent, the lowest since 1955.
(Editing by Dale Hudson) Keywords: EUROZONE ECONOMY/INFLATION
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