Eurozone inflation slips back below zero, upping pressure on ECB

Prices in the eurozone fell by 0.2 per cent year-on-year in February, a new estimate showed Monday, pushing inflation back into negative territory and making fresh action by the European Central Bank increasingly likely.

Fears of deflation have dogged the 19-country European currency bloc, which has also been struggling to rev up its economy after emerging from recession more than two years ago.

Analysts had expected prices to rise by 0.1 per cent year-on-year in February, after a 0.3-per-cent increase the previous month, but the initial projection by EU statistics agency Eurostat came in 0.5 percentage points below the January figure.

It is the first time inflation has slipped back into negative territory since September - despite the ECB ratcheting up its efforts late last year to stave off a prolonged period of deflation.

ECB chief Mario Draghi has indicated that the Frankfurt-based bank could take further action in March. Its goal is to keep inflation just below 2 per cent.

Monday's data "pretty much seals the deal on additional monetary easing," said Teunis Brosens of ING Bank. Jennifer McKeown of Capital Economics also predicted a "decisive increase" in ECB support.

But Barclays analyst Fabio Fois said the bank was "unlikely to overreact," while Joerg Zeuner, the chief economist at the German state investment bank KfW, predicted that an inflation rate of 2 per cent would be achievable next year.

February's inflation data was dragged down by falling energy prices, which contracted 8 per cent year-on-year, compared to 5.4 per cent in January.

The biggest year-on-year increases were seen in services, followed by food, alcohol and tobacco prices and non-energy industrial goods, according to the preliminary data.

"Should oil [prices] and the euro remain at current levels, the latest bout of deflation could last for a few months," McKeown warned. Persistently low inflation is "especially bad for debt-laden households, businesses and governments," Brosens added.

Deflation can lead to reduced consumer spending amid expectations that prices will drop further, cutting into companies' profits and prompting them to cut their workforce, thus increasing unemployment.

Last update: Fri, 24/06/2016 - 08:49

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