Tuesday 30 June 2009

2ND UPDATE: Euro-Zone CPI Falls First Time On Record In June

2ND UPDATE: Euro-Zone CPI Falls First Time On Record In June

(Adds detail, economist comment.)

By Ilona Billington

LONDON (Dow Jones)--Consumer prices in the 16 countries that use the euro declined on the year in June, the first negative consumer price index reading since records began in January 1997.

European Union official statistics agency Eurostat said Tuesday that the euro-zone CPI fell 0.1% on the year in June. In May, the index was flat on the year.

While a decline was expected, economists surveyed by Dow Jones Newswires last week were expecting a steeper decline of 0.2%.

With inflation slowing further below the European Central Bank's inflation target rate of around 2% in recent months, the ECB recently said it is expecting consumer prices to fall on the year, adding that this will be short-lived and prices should start rising again by the end of the year.

Other price data, however, suggest that a longer period of deflation and also a fall in core consumer prices, which strip out volatile food and energy prices, in 2010 is likely.

"At this stage, we expect negative inflation rates for the next six months or so," said Daniele Antonucci, European economist for Capital Economics. "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."

The forward-looking producer price indexes for May from both France and Italy dropped sharply on the year.

In France, the PPI fell 0.2% on the month and 6.7% on the year, although French statistics office INSEE said this was a less steep decline than the 7.8% annual fall reported in April. The decline was largely due to lower food prices.

In Italy, producer prices fell 0.2% on the month and 6.1% on the year, the sharpest fall since January 2006. The fall, here, was driven by lower energy costs, statistics office Istat said.

Money-supply data for the euro zone released earlier Tuesday by the ECB showed that growth slowed sharply in May, suggesting "that the downside risks to inflation in the longer term continue to rise," said Martin van Vliet, European economist for ING Economics.

And, the Organization for Economic Cooperation and Development said Wednesday that the annual inflation rate for the OECD's 30 members was just 0.1%. That is the lowest rate since records began in 1971 and 10 of the 30 member countries reported annual deflation.

Although the widespread reports of falling consumer prices are a concern, economists say the danger of core deflation in 2010 is even more worrying.

"While the negative headline CPI print will no doubt attract headlines, we are now approaching the low point for energy and food inflation," said Eoin O'Callaghan, European economist for BNP Paribas SA. "It is the potential for negative core inflation that is far more newsworthy."

O'Callaghan added that he expects a gentle downward trend to continue in the core measure of inflation "and we expect negative core prints by the second half of 2010."

The ECB is expected to keep its key interest rate and other policy measures unchanged at its meeting Thursday, but economists say that the central bank's less aggressive approach could have dire consequences for the euro zone.

"With a more timid policy response than elsewhere, the risk is that the euro zone might ultimately enter a more prolonged and damaging period of deflation," said Capital Economics' Antonucci.

-By Ilona Billington, Dow Jones Newswires; 44 20 7842 9452; ilona.billington@dowjones.com

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(END) Dow Jones Newswires

June 30, 2009 06:58 ET (10:58 GMT)

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