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Eurozone inflation in surprise fall to 0.7 percent

Monday - 3/17/2014, 9:28am  ET

A protesters shouts slogans during a demonstration against new government measures to increase the price of public transportation in Barcelona, Spain, Saturday, March 15, 2014. (AP Photo/Manu Fernandez)

PAN PYLAS
Associated Press

LONDON (AP) -- Pressure on the European Central Bank to do more to prevent prices from falling in the 18-country eurozone ratcheted up Monday after figures showed inflation across the region unexpectedly fell in February to its lowest level since October.

Figures released Monday by the Eurostat statistics agency showed consumer prices were 0.7 percent higher in February than the year before. That was lower than the 0.8 percent initial estimate and took the annual rate down to the level it was in October, which was the lowest level since late 2009.

The figures are likely to reinforce concerns in the markets that the eurozone risks suffering a bout of deflation, or falling prices. Deflation can hurt an economy by encouraging consumers and businesses to delay spending in the hope of cheaper bargains further down the line.

The inflation rate, which is way below the level the ECB's target of just below 2 percent, also comes at a time when the euro has been buoyant in currency markets. A higher currency can pressure inflation downwards in two ways: It can make imports cheaper and weigh on economic activity by making exports more expensive on international markets.

Following the data, the euro was down 0.2 percent on the day at $1.3890. In recent sessions, the euro had nearly breached the $1.40 mark for the first time since October 2011.

The Eurostat figures showed that four of the 18 European Union countries that use the euro as their currency -- Greece, Cyprus, Portugal and Slovakia -- are currently experiencing a fall in prices. Others such as Spain and Ireland barely saw prices rise, while no euro country has a rate of 2 percent or more.

A spokeswoman for the statistics agency said the main reason for the revision was lower data from Germany, which has an annual inflation rate of 1 percent.

"The slowing of prices in stronger economies gives the ECB more latitude to act, and as such it might be prudent for the ECB to strengthen its policy stance in the coming months as a precaution," said Tom Rogers, a senior economic adviser at EY.

At a press briefing this month following the ECB's decision to keep its main interest rate unchanged at the record low of 0.25 percent, the bank's president, Mario Draghi, was cautiously optimistic about the outlook for the economy, adding he did not expect broad-based deflation.

Even so, he said the bank is assessing what it can do in the event the recovery stalls or prices do start falling. Options that have been mooted include a further reduction in the main interest rate, possibly to 0.10 percent, and cutting the deposit rate to below zero, which would encourage banks to lend rather than park their cash at the central bank.

Howard Archer, chief European economist at IHS Global Insight, said the prospect of any further ECB action in the months ahead could depend on how the euro and the recovery perform.

"We believe that if the ECB does act, it will most likely be in the form of measures aimed at adding liquidity," he said.


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