European Inflation Slows

Europe’s inflation rate dropped to the lowest in more than two years in December as energy prices fell and consumers cut spending, giving the European Central Bank scope to lower interest rates to tackle the deepening recession.

The inflation rate in the euro area fell to 1.6 percent from 2.1 percent in November, the European Union statistics office in Luxembourg said today. The December rate was the lowest since October 2006 and matched the initial estimate published on Jan. 6.

As the euro-zone economy contracts and energy costs decline amid slackening demand, ECB policy makers meeting in Frankfurt today lowered the benchmark lending rate by half a percentage point. Crude-oil prices have dropped 75 percent from a record $147.27 a barrel in July and energy costs fell 3.7 percent in December, the first annual decline since August 2007, today’s data showed.

The ECB forecasts inflation will average 1.4 percent in 2009 and 1.8 percent next year, compared with 3.3 percent in 2008. The central bank also predicts the economy will contract about 0.5 percent this year, which would be the first full-year drop in gross domestic product since the euro’s launch a decade ago.

European Inflation Slows, Bloomberg
1/15/2009 6:46:00 AM