Fall in Spanish and German prices raises fear of deflation

Concerns that the euro zone could be drifting towards deflation received a fresh jolt yesterday after Germany and Spain reported a drop in consumer price pressures.

The latest decline will weigh on decision-makers in the currency bloc and could provide more encouragement to the European Central Bank, which meets next week to decide on interest rates, to ease monetary policy further.

According to a flash estimate by Spain’s national statistics office, consumer prices fell 0.2 per cent in March compared with the same period last year, the second time the year-on-year rate dropped to negative territory in recent months. Analysts had expected prices to rise minimally.

Spain’s consumer price index showed a decline of 0.1 per cent in October, the first such drop since 2009.

Deflation risk
In recent weeks that sanguine view has given way to warnings from Madrid that Spain may indeed have a problem with persistently low inflation. Luis Linde, the governor of the Bank of Spain, told a conference this week that the risk of deflation was "not zero".

“If you ask me whether there is a high probability [of deflation], I would say no. But even if the probability is low, the ECB should take measures to anticipate this, with a stronger monetary relaxation. Interest rates are low now, but they could be lower still.”

Later yesterday, figures from Germany’s Federal Statistics Office added to pressure on the ECB to act after they showed inflation in the currency bloc’s largest economy slowing to 0.9 per cent, from 1 per cent last month.

Price pressures in Germany and Spain eased in part because of last year’s early Easter, a time when many companies raise prices. But the data means the inflation rate in the euro zone is likely to fall to a record low, raising calls for the ECBd to act next Thursday.

Eurostat, the commission’s statistics bureau, will publish a flash estimate for euro-zone inflation on Monday, with a figure of 0.6 per cent expected, down from 0.7 per cent.

"Today's inflation data do by no means signal any deflationary tendencies in the German economy," said Carsten Brzeski, economist at ING. "Unless energy prices unexpectedly drop further, today's reading should mark the trough in German headline inflation this year."

He added: "For the ECB, however, German inflation data could cause another headache in Frankfurt. We don't think that the ECB will react to a single data release but Monday's inflation data could tip the balance in a governing council which does not seem to have made up its mind yet."
– Copyright The Financial Times Limited 2014