Inflation in both Germany and France has slowed to levels which are provoking fears that the main Continental economies are now flirting with deflation.

Inflation in both countries is now running close to zero in January and February, leading to concerns that a period of deflation could be looming. Deflation occurs when there is a general decline in prices, which hurts economic activity by discouraging investment.

German prices rose just 0.2 per cent in the year to the end of January, the lowest rate since pan-German records began in 1991. Earlier this week the French also reported inflation of just 0.2 per cent in the year to the end of January.

Analysts are divided over whether this will lead to an early interest rate cut from the European Central Bank.