European producer-price inflation eased to the slowest in 16 months in December on falling oil prices, giving the region’s central bank room to lower interest rates more amid the worst economic outlook since World War II.
Factory-gate prices in the euro region rose 1.8 per cent from a year earlier after a 3.3 per cent increase in November, the European Union's statistics office in Luxembourg said today.
That is the slowest inflation at the producer level since August 2007.
With oil prices down more than two-thirds since a July peak, slowing inflation is providing the European Central Bank more scope to further cut rates to spur lending and boost the region's contracting economy.
The ECB, which has more than halved its key rate since early October to match a record-low 2 per cent, last month signalled another reduction is likely in March.
There is "sharply declining inflation in the euro zone," said Carsten Brzeski, an economist at ING Groep NV in Brussels.
This "provides more room for the ECB to cut rates in March." The global financial crisis is derailing purchases of cars and factory machinery and forcing companies to reduce output and cut jobs.
The International Monetary Fund predicts the 16-nation euro-area economy will contract 2 per cent this year.
The pace of decline in Europe's manufacturing industry eased for the first time in five months in January.
A gauge of manufacturing activity was at 34.4 after reaching a record low of 33.9 in December, a survey of purchasing managers by Markit Economics showed yesterday. A reading below 50 indicates contraction.
Crude oil reached a record $147.27 a barrel in July, which pushed producer-price inflation to 9.2 per cent in August, the highest since the data series began in 1990. Oil has since dropped more than 70 per cent to around $41.
Royal Dutch Shell, Europe's largest oil company, last week posted its first quarterly loss in 10 years following the plunge in oil prices, and warned that industry conditions "remain challenging." BP today also reported a loss for the latest quarter, its first in seven years.
Energy-price inflation at the producer level slowed to 2.1 per cent in December from 6.2 per cent in November. From the previous month, energy prices fell 3.7 per cent, while overall prices slipped 1.3 per cent. The core rate of inflation, which excludes energy and construction, slowed to 1.6 per cent.
The decline in prices at the pump drove down Europe's consumer-price inflation to 1.1 per cent in January from 1.6 per cent in the prior month.
Bloomberg