With inflation rate falling to -0.2 %, Eurozone dips into deflation

EPA/OLIVER BERG

With inflation rate falling to -0.2 %, Eurozone dips into deflation


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Prices in the euro zone fell in February, falling short of already depressed expectations, in a development that will boost expectations that the European Central Bank will unveil another stimulus package at its next policy meeting on March 10.

Combined with weak sentiment and output data, the dismal inflation figures suggest that the bloc’s tepid growth is slowing, adding to calls for fiscal and monetary policy action to prop up an economy that has yet to grow back to its pre-crisis size.

Statistics agency Eurostat said consumer prices across the region were down 0.2 % in February from the year before, against a 0.3 % rise the previous month. The decline was way more than anticipated — the consensus in the markets was for a drop to zero.
The decline is largely due to a big decrease in energy costs, which were 8 % lower in the year to February against the previous month’s 5.4 % drop.

However, the core rate, which strips out the volatile items of energy, food, alcohol and tobacco, was weak too, falling to 0.7 % from 1 %. That shows how weak price pressures are in the economy.

Since the ECB aims for inflation just below 2 %, February’s negative rate could mean it cuts interest rates further or expands its bond-buying program. ECB President Mario Draghi has consistently hinted at further measures over the past few weeks.

The great concern is that inflation will turn even more negative over the coming months because of the continued weakness in oil prices and a murkier global economic outlook, largely fueled by unease over the scale of the economic slowdown in China.

The eurozone did experience a bout of falling prices about a year ago but it didn’t last long, helped in part by the ECB’s stimulus and a falling euro, which made the price of imports dearer. (with AP, Reuters)

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