GERMAN INFLATION has turned negative for the first time in more than 20 years, presaging a similar fall in prices across the euro zone that would add to pressures facing the European Central Bank as it grapples with Europe’s severe recession.

Consumer prices in Germany fell 0.1 per cent this month from a year ago on a European harmonised basis, the country’s statistical office said yesterday. The unexpected drop was the first negative annual inflation rate since comparable records began in 1996, and since March 1987 on the previous basis.

The German data stoked expectations that euro zone figures due tomorrow would show annual inflation in the 16-country region at about zero in May. A dip into negative territory was likely in June, economists said.

Spain, Ireland and Portugal - three of the euro zone countries worst hit by the global downturn - have already reported negative annual inflation rates.

Inflation has tumbled following steep falls in oil and commodity prices.

“Energy is behind the wild swings, but core inflation is easing quite a lot and that is because we have the deepest recession since the 1930s,” said Dirk Schumacher at Goldman Sachs in Frankfurt.

Falling headline inflation rates will fuel fears of deflation, a sustained period of generalised price falls that could weaken Europe’s economies further and delay a recovery.

The ECB has warned that headline euro zone inflation rates may be negative for months and undershoot by a large margin its definition of price stability: an annual inflation rate “below but close” to 2 per cent.

However, it argues short-term inflation trends are irrelevant for monetary policy and sees inflation rising later this year. – Copyright The Financial Times Limited 2009