BRUSSELS – Inflation across the 19-country eurozone turned negative in February, official figures showed Monday, in a development that will boost expectations that the European Central Bank will unveil another stimulus package at its next policy meeting on March 10.
Statistics agency Eurostat said consumer prices across the region were down 0.2 per cent in February from the year before, against a 0.3 per cent rise the previous month. The decline was way more than anticipated — the consensus in the markets was for a drop to zero.
The decline is largely due to a big decrease in energy costs, which were 8 per cent lower in the year to February against the previous month’s 5.4 per cent drop.
However, the core rate, which strips out the volatile items of energy, food, alcohol and tobacco, was weak too, falling to 0.7 per cent from 1 per cent. That shows how weak price pressures are in the economy.
Since the ECB aims for inflation just below 2 per cent, February’s negative rate could mean it cuts interest rates further or expands its bond-buying program. ECB President Mario Draghi has consistently hinted at further measures over the past few weeks.
The great concern is that inflation will turn even more negative over the coming months because of the continued weakness in oil prices and a murkier global economic outlook, largely fueled by unease over the scale of the economic slowdown in China.
The eurozone did experience a bout of falling prices about a year ago but it didn’t last long, helped in part by the ECB’s stimulus and a falling euro, which made the price of imports dearer.
When falling prices become entrenched they can weigh heavily on an economy. So-called deflation can become a vicious cycle and push prices down further. Falling prices could prompt consumers to delay purchases and businesses to shy away from investments. Japan’s experience over 25 years shows just how difficult it is break out of deflation.