Deflation threat grows as Eurozone prices fall again

Tim Wallace
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Unemployment is low in Germany but stubbornly high in states like Spain and Greece
PRICES in the Eurozone fell for the third consecutive month in February, data showed yesterday, while unemployment continued its slow decline.

Inflation was meant to come in at close to, or just below, two per cent – but in the 12 months to February it stayed below zero, at minus 0.3 per cent.

That follows a 0.6 per cent fall in prices in January and a 0.2 per cent decline in December.

Oil prices have been particularly strong factors in pulling prices down – energy prices fell 7.9 per cent on the year to February, Meanwhile unemployment edged down from 11.3 per cent in December to 11.2 per cent in January.

“The continued fall in Eurozone consumer prices and the still-high rate of unemployment in January confirm that the European Central Bank faces an uphill battle against the threat of deflation,” warned Jennifer McKeown at Capital Economics.

She fears slow GDP growth and low pay rises will further hold down prices.

“The latest economic indicators suggest that GDP is rising far too slowly to erode the spare capacity in the economy. And there are few signs of inflationary pressure from the labour market,” said McKeown.

“Against that backdrop, the quantitative easing programme beginning this month is unlikely to push inflation to anywhere near the ECB’s target of close to two per cent and the risk of a sustained bout of deflation remains significant.”

Unemployment rates vary enormously between Eurozone countries. Spanish unemployment dipped from 23.6 per cent to 23.4 per cent, while Italy’s slid from 12.7 per cent to 12.6 per cent.

France’s jobless rate stands at 10.2 per cent, down from 10.3 per cent in December, while Germany’s remains the lowest in both the Eurozone and the whole EU, down from 4.8 per cent to 4.7 per cent.

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