Euro-Area Inflation Rate Falls to Zero

Europe’s inflation rate dropped to zero in May as energy costs retreated and the global economic slump forced companies to lower prices.

Inflation in the economy of the 16 euro-area nations is at the lowest level since the data were first compiled in 1996 and is down from 0.6 percent in April, the European Union statistics office in Luxembourg said today, confirming an initial estimate published on May 29. European labor costs rose 3.7 percent in the first quarter from a year earlier, a separate report showed.

European companies have cut spending and eliminated jobs to weather the region’s worst recession since World War II just as a 47 percent drop in oil prices over the past year is pushing down inflation. European Central Bank President Jean-Claude Trichet said on June 4 that he doesn’t see a risk of deflation, with annual price moves expected to turn negative only temporarily” over the summer.

With the financial crisis curtailing sales of products from chemicals to cars, Europe’s capacity utilization rate fell to 70.5 percent in the second quarter, the lowest in 19 years. The ECB expects the euro-area economy to contract about 4.6 percent this year and 0.3 percent in 2010.

Retreating oil prices have helped ease cost pressures and left companies and consumers with more money to spend. Core inflation, excluding volatile costs such as energy and food, slowed to 1.5 percent last month from 1.8 percent in April.

The ECB on June 3 lowered its inflation forecast for this year to about 0.3 percent from 0.4 percent. In 2010, euro-area inflation may average 1 percent, staff projections showed. The ECB aims to keep inflation just below 2 percent.

A gauge of European consumers’ price expectations fell to minus 7 in May, the lowest since the indicator was created in 1990, the European Commission said last month. The gauge turned negative in April for the first time.

Euro-Area Inflation Rate Falls to Zero, Bloomberg
6/16/2009 8:33:54 AM