Euro zone inflation zero in year to May

Slides
Photos

(Agencies)
Updated: 2009-05-29 20:06

LONDON -- The 16 countries that use the euro saw consumer prices unchanged in the year to May, official figures showed Friday, stoking expectations that the European Central Bank will soon take steps to ward off a dangerous spiral of falling prices.

The European Union's first estimate of 0.0 percent inflation was down from the 0.6 percent increase recorded in April and analysts' forecasts for a 0.2 percent rise.

A more complete picture will emerge next month when Eurostat publishes its next estimate though analysts said the decline in May was likely to have arisen from the continued easing in both food and energy pressures on a year-on-year basis. Though crude oil prices have recently spiked up to 2009 highs above $60 a barrel, they remain well below the $147 a barrel peak hit last July.

Whatever the European Central Bank does in the coming weeks and months, analysts predicted prices would actually start to fall, probably from June.

Ben May, European economist at Capital Economics, said further falls in food and energy inflation should ensure that the headline rate turns negative soon.

"And with spare capacity rocketing and the slowing labor market set to place downward pressure on wage growth, the chances of a more prolonged and damaging period of deflation appear to be growing," said May.

As a result, analysts think the European Central Bank will confirm its intention to start buying some limited financial assets from the banks more or less straightaway when its governing council meets next Thursday. The hope behind such a policy is that it may inflate certain asset prices, thereby preventing inflation from staying negative for too long, which would could engender a bout of deflation -- a vicious circle of falling prices, investment and demand.

However, most analysts doubt the European Central Bank, which has a mandate to keep inflation "close to but below 2 percent", will cut its benchmark interest rate again from the current 1 percent.

Of particular interest next Thursday will be the Bank's updated projections for growth and inflation.

Most analysts think it's inevitable that the ECB will admit that the recession this year will be deeper than previously anticipated after the euro zone contracted by a massive 2.5 percent in the first quarter from the previous three month period. In March, it predicted that gross domestic product in 2009 would fall between 2.2-3.2 percent.

The European Central Bank has been criticized by some analysts for not being as aggressive as either the US Federal Reserve or the Bank of England, both in cutting interest rates and in promoting unconventional to boost the money supply via the purchase of financial assets.