By Simone Meier
May 29 (Bloomberg) -- The euro region’s inflation rate fell to zero for the first time in at least 13 years in May as energy costs retreated and the worst recession in more than six decades prompted companies to cut prices.
The annual rate is the lowest since the data were first compiled in 1996 and is down from 0.6 percent in April, the European Union statistics office in Luxembourg said in an initial estimate today. Economists expected a rate of 0.2 percent, according to a Bloomberg News survey.
A 50 percent drop in energy prices over the past year is pushing down inflation just as companies are cutting jobs and prices to weather the worst global slump since World War II. In Germany, Europe’s largest economy, consumer prices unexpectedly posted the first annual decline since at least 1996 this month.
Still, European Central Bank Vice President Lucas Papademos said on May 27 that the risk of deflation is “limited.”
“We’ll see the first negative rates in June and they’re likely to remain well in the negative territory through September,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “Labor costs are bound to go down significantly with unemployment rising through 2010. The ECB will have to monitor the situation very closely.”
The euro extended gains against the dollar after the inflation data. The European currency traded at $1.4037 at 10:30 in London, up 0.7 percent on the day.
Oil Prices
Retreating oil prices have helped ease cost pressures and left companies and consumers with more money to spend. A gauge of consumers’ price expectations fell to minus 7 in May, the lowest since the indicator was created in 1990, the European Commission in Brussels said yesterday. The gauge turned negative last month for the first time. European core inflation, excluding energy and food prices, is currently at 1.8 percent.
“Core inflation will edge lower over the next few months and quarters and eventually turn negative in 2010,” said Luigi Speranza, an economist at BNP Paribas in London. “This will be a cause for concern at the ECB.”
The EU said on May 4 that it expects the euro-area economy to shrink 4 percent this year instead of a previously projected
1.9 percent. In 2010, the region’s gross domestic product may contract 0.1 percent, according to the EU forecasts.
European Aeronautic, Defence & Space Co., the region’s largest aerospace company, on May 27 repeated its forecast for lower earnings this year partly because of declining prices. Rio Tinto Group, the world’s second-largest iron-ore exporter, this week agreed to a 33 percent cut in contract prices with Japan’s Nippon Steel Corp., the first decline in seven years.
Cost Cuts
Praktiker AG, Germany’s second-largest home-improvement retailer, has been offering customers discounts of around 20 percent this year to bolster demand. RWE AG, Germany’s second- biggest utility, plans to cut consumer natural-gas tariffs by up to 15 percent on July 1. Paris-based PSA Peugeot Citroen said earlier this month that cost cuts at Europe’s No. 2 automaker are a “necessary condition” to counter the crisis.
With employers firing workers to cope with declining demand, Europe’s jobless rate probably rose to 9.1 percent in April from 8.9 percent in the previous month, according to a Bloomberg survey. That would be the highest since October 1999.
The statistics office will release the report on June 2.
ECB President Jean-Claude Trichet said earlier this month that while he expects euro-region inflation rates to decline further and “temporarily” turn negative around mid-year, they are expected to accelerate again in the second half. The Frankfurt-based ECB aims to keep inflation just below 2 percent.
‘Temporary Disinflation’
“The risk of deflation in the euro area remains very limited,” Papademos said in Athens on May 28. “This temporary disinflation does not constitute a persistent, broad-based and self-sustaining decline in the overall price level, which may be reinforced by the anticipation that prices will decline further in the future,” he said.
“It is likely that underlying inflationary pressures will be further diluted as extended very weak demand hits companies’
pricing power hard,” said Howard Archer, chief European economist at IHS Global Insight in London. With “a period of deflation now imminent, the ECB has ample scope to keep interest rates down at 1 percent for an extended period.”
The ECB this month trimmed its benchmark interest rate to 1 percent, a record low, and pledged to buy 60 billion euros ($84 billion) of covered bonds to fight the economic crisis. Trichet has said that details of the asset-purchase plan will be released on June 4 along with the bank’s latest forecasts for inflation and the economic development.
Tue May 03, 2016 9:51 am by Andrea ForexMart
Subject: (BN) Euro-Area Inflation Rate Falls to Zero for First Time 
