Signs of deepening slump

Euro-area inflation rate falls more than economists forecast

ZURICH: European inflation slowed more than economists forecast this month, cooling to the least in more than a year as the economic slump showed signs of deepening.

The inflation rate in the 17-nation euro-area fell to 2.4% from 2.6% in April, the European Union’s statistics office in Luxembourg said yesterday. That’s the slowest since February 2011. Economists forecast a 2.5% rate, based on the median of 32 estimates in a Bloomberg News survey.

Crude-oil prices have dropped about 16% in the past two months, easing inflation pressures and giving the European Central Bank (ECB) more room to focus on ways to bolster the economy after Greece’s inconclusive elections raised investor concerns about a euro break-up. The single currency slumped to a near two-year low versus the dollar this week and European economic confidence dropped more than economists forecast in May.

The slowdown in inflation “looks set to continue,” but will “probably be a slow-motion process,” said Martin van Vliet, an economist at ING Bank in Amsterdam. “Although the ECB will likely keep interest rates on hold next week, president Draghi could open the door to further monetary easing later this year.”

Euro-area core inflation, which excludes volatile costs such as energy, held at 1.6% in April. The statistics office will release a breakdown of May inflation next month.

The euro rose against the dollar yesterday, gaining 0.5% to US$1.2424 in London. It’s fallen about 6% in the past month, which may fuel importprice pressure.

The ECB, which aims to keep inflation just below 2%, will publish its latest economic projections when council members meet on June 6.

In March, it forecast inflation to average 2.4% this year and 1.6% in 2013, with the economy contracting in 2012.

Adding to signs of a deepening slump, German business confidence fell more than economists forecast in May, recording the steepest decline since August. A gauge of euro region manufacturing output dropped to the lowest in 35 months in May, while a measure of service industries fell to a seven-month low.

Still, data yesterday showed the German unemployment rate fell to 6.7% in April from 6.8% in March.

The inflation and jobless data “were rare pieces of good news for the beleaguered eurozone,” said Ben May, an economist at Capital Economics in London. “But the recent sharp falls in business sentiment and activity and the deepening debt crisis mean that the economic outlook remains bleak.”

Retreating energy costs are easing pressure on the ECB as the crisis worsens. Spanish Prime Minister Mariano Rajoy last week called on the Frankfurt-based central bank to buy his government’s bonds, after yields approached the level that pushed Ireland, Greece and Portugal into seeking external aid.

“The ECB has done a number of measures that were very helpful and efficient for the economy,” ECB council member Ewald Nowotny said yesterday. “We are now in a situation where we have to see how these measures have worked in the economy.”

Responding to criticism that the ECB’s liquidity policies are stoking inflation, executive board member Joerg Asmussen said on May 24 that there is “no reason to question our commitment to price stability.” – Bloomberg