Eurozone Inflation Plunges to Record Low

Eurozone inflation has fallen to a record low, strengthening the case for further European Central Bank action to boost the economy of the 16-country bloc and head-off any risk of deflation., Financial Times 3/31/2009 5:10:09 AM

The annual rate of eurozone price increases fell more than expected from 1.2 per cent in February to just 0.6 per cent in March, according to an initial estimate by Eurostat, the European Union’s statistical unit.

That was the lowest since comparable records began in the early 1990s. Some economists calculated that it was the lowest seen in continental Europe for half a century. It also pointed to substantial undershooting of the ECB's target of an annual inflation rate "below but close" to 2 per cent.

Oil prices accounted for much of the fall but economists said the weakness of the eurozone economy almost certainly added significantly to the downward pressure on prices. Eurostat gave no details.

Spain earlier this week became the first eurozone country to report a negative annual inflation rate. The ECB is braced for the overall eurozone inflation rate to turn negative in coming months, and the unexpected weakness of the eurozone data could heighten fears that the region will enter a deflationary phase.

The ECB sees full-blown deflation – sustained and general falls in prices that wreak substantial economic damage - remaining a remote risk, largely because of rigidities in the eurozone economy. Jean-Claude Trichet, ECB president, told the European Parliament on Monday that neither the ECB nor other international institutions considered the risk of eurozone deflation to be elevated and substantiated”.

But Mr Trichet added that, we have to remain permanently alert”. The danger it faces is that negative inflation rates fuel expectations about future trends in prices that become deflationary. A European Commission report this week showed that the rate of price increases expected by eurozone consumers for the next 12 months was the weakest since its survey began in 1985.

Eurozone Inflation Plunges to Record Low