EURO ZONE retail sales dropped much more than expected and producer prices fell in February, underlining the weakness of consumer demand and waning inflationary pressures in the contracting economy, data showed.

The EU’s statistics office said retail sales in the 16 countries using the euro fell 0.6 per cent month-on-month in February for a year-on-year 4 per cent decline.

Economists polled by Reuters had expected a 0.4 per cent monthly fall and a 2.5 per cent annual drop.

“February’s fall in euro zone retail sales confirms that spending is not benefiting from sharp falls in inflation,” said Jennifer McKeown, economist at Capital Economics.

Eurostat said prices at factory gates in the euro zone fell 0.5 per cent month-on-month in February, as expected by markets, for a year-on-year 1.8 per cent fall against forecasts of a 1.6 per cent decline.

The main driver behind the annual fall in producer prices was a 4.5 per cent drop in energy costs thanks to lower prices of oil and gas.

Intermediate goods prices were down 3.1 per cent and price rises for durable consumer goods and capital goods slowed for the fourth month in a row.

Retail sales are an indication of household demand, which has been under pressure from quickly rising unemployment as the euro zone economy sinks into its worst economic crisis since the second World War.

“Given the rapid deterioration in labour market conditions, consumer spending will probably remain very weak in the near term at least despite the relatively healthy state of household finances,” Ms McKeown said.

Producer prices show inflationary pressures early in the pipeline as their rise or fall is usually later reflected in consumer prices, which the European Central Bank wants to keep below but close to 2 per cent. – (Reuters)