Eurozone inflation falls sharply

| June 30, 2009 | 0 Comments
Eurozone inflation falls sharply

There are fears for the euro zone today after official figures revealed that the area is heading for a period of deflation.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

Eurostat today said inflation in the 16 countries using the euro turned negative in June for the first time since the single currency was introduced over a decade ago.

Prices in the euro zone fell 0.1% over the last 12 months - the inflation rate had been 0% in May.

The European Central Bank’s (ECB) target rate for inflation is just under 2%.

Inflation in the 16-nation zone has been dragged down by falling food and energy prices and by a slump in demand for goods from companies and households.

Daniele Antonucci from Capital Economics said: “There are plenty of reasons to believe that the annual decline of 0.1% in June is just the beginning of a downward trend.”

“At this stage, we expect negative inflation rates for the next six months or so. With factory gate prices falling, wage growth likely to slow sharply and a big amount of spare capacity in the economy, core inflation will decelerate considerably.”

Earlier this month, the ECB elected to keep interest rates for the euro zone on hold at 1%. The ECB’s president, Jean-Claude Trichet, said he expects the economy to contract by up to 5.1% in 2009 and signalled it would also struggle to grow in 2010.

Meanwhile, euro zone unemployment hit a 10-year high as the nation grapples with recession. The latest figures take the unemployment rate to 9.2% in April, up from 8.9% in March.

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