Eurozone slumps into deflation for first time in ten years

Analysts warn of further rise in unemployment if deflation persists

 Inflation in the 16-member eurozone has slipped into negative territory for the first time since the currency bloc was formed a decade ago, data released on Tuesday showed.

After sliding to zero in May, annual seasonally adjusted inflation in the 16-member eurozone dipped to minus 0.1 per cent in June, the European Commission’s statistics office Eurostat said. Analysts had forecast a rate of minus 0.2 per cent.

“At this stage, we expect negative inflation rates for the next six months or so,” said Daniele Antonucci, European economist with the Capital Economics research group.
“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,” Antonucci said. European Central Bank (ECB) chief Jean-Claude Trichet has already warned of the threat of deflation emerging in the eurozone as 2009 unfolds. The ECB has an annual inflation target of close to, but below, 2 per cent.

Analysts say that a prolonged period of deflation would threaten a contraction in economic activity and result in a rise in unemployment. However, they expect eurozone inflation to move back into positive territory by the end of year as economic growth in the currency bloc gains traction.

One of the key factors leading to deflation in the eurozone has been the sharp fall in energy costs, compared to a year ago when bullish global demand helped to drive oil prices up to an historic high of nearly $150 a barrel.

This, in turn, resulted in annual eurozone inflation surging to four per cent in July 2008.
The latest eurozone inflation also comes in the build-up to Thursday’s monthly ECB meeting, which is expected to leave interest rates in the currency bloc on hold at a record ECB low of one per cent as the bank deliberates upon the current economic climate.