Deflation hits Eurozone bloc

THE Eurozone annual rate of inflation was negative in June for the first time since the single currency was introduced in 1999, official data showed yesterday.<br /><br />Eurostat said that annual inflation was -0.1 per cent last month, down from 0.0 per cent in May. Monthly inflation was 0.2 per cent. The fastest drop in prices was recorded in Ireland, Portugal, Spain, Belgium and Luxembourg.<br /><br />Food price inflation fell to -0.2 per cent from 0.3 per cent and the core measure excluding food, energy, alcohol, and tobacco edged lower from 1.5 per cent to 1.4 per cent.<br /><br />The sharply lower energy prices this year compared to the historic highs recorded last summer have also had a downward effect.<br /><br />But the 16-country bloc is not expected to stay in deflationary territory for an extended period of time and while inflation is expected to undershoot the European Central Bank&rsquo;s (ECB) target both this year and next, the one-off falls in food and energy prices will reduce the possibility that the ECB will hike rates.<br /><br />ING&rsquo;s Martin van Vliet said: &ldquo;The most likely scenario is for inflation to stay in negative territory in coming months, before turning positive again later this year and rising further into 2010.&rdquo;<br /><br />&ldquo;But the rise in the headline rate will be dampened by further sharp falls in core inflation, emanating from the substantial margins of spare capacity in the economy opened up during the recession,&rdquo; he added.<br /><br />However, the ECB will need to be cautious that deflation does not become established over the coming months.