A steep drop in fuel and food costs caused euro zone inflation to fall year-on-year for the first time in June, data showed, and a deeper price decline is likely in July with the added pressure of summer sales.
Consumer prices in June rose 0.2 per cent month-on-month and fell 0.1 per cent from a year earlier, the EU statistics office said today, confirming its year-on-year figure reported two weeks ago.
The numbers came in line with economists' expectations in a Reuters poll.
"Summer months typically see strong seasonal discounts," said Luigi Speranza, economist at BNP Paribas.
"Given weakness in demand, we assume these discounts will be greater than average. Combined with energy-related base effects, these forces should push inflation well into negative territory, to -0.5 per cent year-on-year in July on our estimate," he said.
The European Central Bank wants annual inflation to be just below 2 per cent over the medium term and is wary of deflation, which it defines as a long period of falling prices and negative inflation expectations.
But after the bank's last rate meeting on July 2nd, ECB President Jean-Claude Trichet dismissed the likelihood of serious deflation. He also brushed off any chance that inflation could rise quickly above the ECB's 2 per cent ceiling.
"We expect the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term," Mr Trichet said on July 2nd.
Economists expect headline inflation to pick up in the second half of this year because oil prices dropped quickly in the second half of 2008, which would make year-on-year price comparisons less favourable for 2009.
"Headline inflation will only briefly remain in negative territory, with annual energy price inflation likely to turn up sharply over the summer reflecting recent oil price rises," said Nick Kounis, economist at Fortis.
"Headline inflation will settle at low levels at the end of next year at just above 1 per cent," he said. "Overall, the coming year or so will be characterised by a low-inflation environment rather than a deflationary one."
The ECB has cut its main refinancing rate to a record low of 1 per cent to boost demand in the recession-hit economy, saying inflation expectations were well anchored. On July 2nd, Mr Trichet gave no sign the ECB planned to move rates soon.
He said rates remained "appropriate", but left the door open for further cuts if needed.
Reuters