Eurozone trapped by deflation in March, but there could be signs of life on the horizon

 
Jake Cordell
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Cheap petrol is one thing dragging down inflation across the Eurozone
Cheap petrol is one thing dragging down inflation across the Eurozone (Source: Getty)

The Eurozone could not shake-off its deflationary funk in March as prices fell for a second consecutive month according to official numbers out this morning.

Inflation, as measured by the "harmonised index of consumer prices" (HICP), was down by 0.1 per cent on the year, with tumbling energy prices dragging down the cost of goods for both consumers and firms.

Cheaper prices may be a boon to spenders, but the headline figure will disappoint policymakers across Europe, who fear falling into a Japan-style spiral of falling prices and weak demand.

Nevertheless, there were some signs of life in the figures. Prices in everything except energy-related goods went up, with "core inflation" - a measurement which ignores the most volatile price movements - running at 1.0 per cent, up from 0.2 per cent in February.

The picture was also starkly different across the Eurozone. Germany will cheer its exit from deflation, with prices rising by a small, but symbolic, 0.1 per cent over the last year after dipping 0.2 per cent in February.

Southern Europe’s largest economies, however, did not fare so well. Inflation in Spain is running at minus 1.0 per cent and in Italy it is minus 0.2 per cent.

Mario Draghi, president of the European Central Bank, has been at the forefront of the continent’s efforts to stoke inflation, recently extending his programme of bond purchases to €80bn (£63bn) and cutting the ECB’s headline interest rate to minus 0.4 per cent.

Read more: Is Draghi's 'Big Bazooka' running out of ammo?

Howard Archer, chief European and UK economist at IHS Global said he expects Draghi to “remain in ‘wait and see’ mode for an extended period.”

“The ECB has indicated that it can take further action if eventually deemed necessary,” Archer added, “but this is more likely to be in the form of more quantitative easing or liquidity measures than further interest rate cuts”.

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