Europe slides further into deflation in July


Berlin : Inflation in the 16-member eurozone tumbled deeper into negative territory in July, data released Friday showed, presenting the European Central Bank (ECB) with a fresh challenge as it attempts to spur growth in the currency bloc’s economy.

Support TwoCircles

The European Commission’s statistics office Eurostat’s preliminary figures showed consumer prices fell more than forecast from minus 0.1 percent in June to minus 0.6 percent this month. Economists had forecast a drop to minus 0.4 percent in July.

The fall in inflation comes in the wake of this year’s dramatic slowdown in global economic demand and on the back of weaker energy and food prices.

But dwindling consumer prices have also helped to stoke fears about the threat of deflation, which in turn could undercut hopes of an early rebound in the eurozone economy from what has been its deepest downturn in more than 60 years.

The eurozone economy shrank by 4.8 percent year-on-year during the first three months of the year.

However, ECB chief Jean-Claude Trichet has insisted that the negative inflation in the eurozone was likely to be short-lived, telling an ECB press conference this month that the latest consumer price data reflected only temporary effects.

Ahead of the release of the eurozone inflation data, the German statistics office said annual inflation in Europe’s biggest economy slipped to minus 0.6 percent from zero in June. The decline was bigger than the minus 0.4 percent forecast by economists.

Friday’s publication of the latest eurozone inflation data comes in the build-up to next week’s meeting of the ECB’s 22-head rate-setting council.

But with eurozone inflation now well below the ECB’s annual target of two percent and the region’s economy struggling to shake off recession, analysts expect the ECB to keep rates on hold well into the new year.

The ECB’s benchmark refinancing rate currently stands at a record low of one percent.

However, analysts say that a sustained period of deflation would threaten a contraction in economic activity and result in a rise in unemployment.

Nevertheless many forecasters believe that consumer prices might start to pick up again by the end of the year with economic growth in the eurozone beginning to gain traction as the global recession slowly fades.

One of the key factors leading to deflation in the eurozone has been the sharp fall in energy costs compared to a year ago when bullish global demand helped to drive oil prices up to an historic high of nearly $150 a barrel.

This in turn resulted in annual eurozone inflation surging to four percent in July 2008.

Deflation, which at first glance appears to be good news for consumers, is regarded by economists as just as dangerous as spiralling inflation.

This is because a protracted period of deflation encourages buyers to put off in making purchases, hoping for yet cheaper prices, but this can hurt companies’ income, often resulting in cutbacks in production and worker layoffs.