A hefty drop in oil costs brought euro zone inflation to its first ever standstill in May, data confirmed today, and economists expect consumer prices to start falling in June.
But despite the depth of the recession and a sharp rise in unemployment, wages in the 16-country area grew during the first quarter at almost the same pace as a year earlier, helping potential household demand.
Consumer prices grew by 0.1 per cent month-on-month in May and were unchanged year-on-year. Energy prices rose 0.4 per cent on the month and fell 11.6 per cent on the year, European Union statistics office Eurostat said.
"Inflation is likely to turn negative this summer as energy and food-related base effects should continue to exert further downward pressures," said Clemente de Lucia, economist at BNP Paribas.
"Inflation should then moderately rebound over the last quarter of the year as base effects will operate in the opposite direction. By contrast, core inflation should continue to ease," de Lucia said.
What the European Central Bank calls core inflation - price growth excluding energy and unprocessed food - was zero on the month and 1.5 per cent year-on-year, down from 1.7 per cent in April.
"Contracting demand, large spare capacity and rising unemployment should continue to push down core inflation over the coming months," de Lucia said.
Employment in the euro zone dropped by a record 1.22 million jobs in the first quarter of 2009.
Another measure of core inflation that economists often look at and which excludes energy, food, alcohol and tobacco prices fell to 1.5 per cent year-on-year from 1.8 per cent.
Belgium, Ireland, France, Spain, Luxembourg and Portugal saw consumer prices fall in May and economists expect their ranks to be swelled by other countries in June.
The ECB, which wants annual inflation to be just below 2 per cent, cut its main refinancing rate to a record low of 1 per cent in May to help the flow of credit in the economy.
A slightly positive signal for recovery prospects came from the data on wages, which rose 3.6 per cent year-on-year in January-March, only marginally below the 3.7 per cent growth in the first quarter of 2008.
Reuters