Eurozone warning: Deflation fears haunt EU economy after collapse in global energy prices

Eurozone warning: Deflation fears haunt EU economy after collapse in global energy prices

Headline inflation in the single currency region fell to 0.1 percent year-over-year from 0.3 percent in April. Figures show energy prices slumped 12 percent year-on-year, having fallen 9.7 percent in April.  Food, alcohol and tobacco prices were down 3.3 percent in May compared with a to a 3.6 percent decline in April.

The fourth consecutive monthly drop in the headline inflation rate will increase the pressure on the ECB to stop the region sliding into deflation.

Economists have predicted the eurozone will fall into the feared territory this year despite the huge stimulus efforts of EU central bankers.

Core inflation – which strips out energy, food, alcohol and tobacco – was steady at 0.9 percent but economists played down its significance and warned the preliminary reading is captured using limited data.

Jessica Hinds, European economist at Capital Economics, said: “The further fall in eurozone inflation in May took the headline rate to within a whisker of zero and downward pressure on prices is set to persist while demand remains weak and unemployment rises.

“Looking ahead, our forecast for oil prices to recover suggests that the drag from energy inflation on the headline rate should now start to ease.

“But the core rate is unlikely to hold up for much longer in the face of the collapse in aggregate demand and subsequent slow recovery, as well as rising unemployment.

“So the European Central Bank’s below-but-close-to 2 percent target will look even further out of reach, keeping the pressure on the Bank.

“And with economic output set to remain below pre-virus levels for the next couple of years, the ECB will keep policy ultra-loose for the foreseeable future.”

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ING economist Bert Colijn said: “The severe economic fallout is having a deflationary effect, which means the ECB is likely to stay in a crisis-fighting mode for some time to come.

“The data leave little to argue about the strategic course for the ECB.”

The data from Eurostat showed Belgium, Ireland, Greece, Spain, Italy and Portugal all suffered deflation in May while prices rose in the more resilient economies of Germany, France and the Netherlands.

The coronavirus crisis has raised the spectre of deflation in an already fragile eurozone economy.

Deflation happens when prices keep chasing each other lower and can be difficult to stop, triggering a vicious downward spiral that can quickly paralyse the economy as investment dries up, companies fail and unemployment soars.

Published at Sun, 31 May 2020 07:39:00 +0000