In a snub to ECB’s denial of deflation European Prices Fall 0.6%.


The question is now when will the European Central Bank finally admit that there is deflation in Eurozone?

European Prices Fall 0.6%; Jobless at Decade High.

July 31 (Bloomberg) — European consumer prices fell by the most in at least 13 years in July after energy costs declined and unemployment rose to the highest in a decade.

Prices in the euro region dropped 0.6 percent from a year earlier, the most since the data were first compiled in 1996, the European Union statistics office in Luxembourg said today. That exceeded the 0.4 percent decrease forecast by economists, according to the median of 32 estimates in a Bloomberg survey. Unemployment rose to 9.4 percent in June, the highest since 1999, a separate report showed.More than 3 million people have joined the euro region’s jobless rolls in the last year, and the Organization for Economic Cooperation and Development expects the unemployment rate to reach 12 percent in 2010. As consumers and companies reduce spending to weather the worst recession in more than 60 years, inflation is also being pushed lower by a 50 percent drop in the price of crude oil over the last year.

“The larger-than-expected drop in inflation and the unrelenting rise in unemployment should serve as a stark reminder to the ECB that medium-term inflation risks in the euro zone are tilted to the downside,” said Martin van Vliet, senior economist at ING Bank in Amsterdam.

The European Central Bank aims for inflation to be just under 2 percent and ECB President Jean-Claude Trichet has said he expects inflation to “temporarily remain negative” before turning positive by year end. While the central bank says mid- to long-term price expectations are “anchored,” a European Commission measure of those expectations fell in July to the lowest since at least 1990, a report showed yesterday.

‘Deflationary Environment’

“The risks on the deflation side are there,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London, which estimates euro-area inflation is the lowest since 1953. “The underlying dynamics do resemble those that you would see in a typical deflationary environment.”

The euro was little changed against the dollar after the data and traded at $1.4108 at 10:43 a.m. in London, up 0.2 percent on the day. The Dow Jones Stoxx 600 Index of European companies rose less than 0.1 percent to 225.31.

The ECB has cut its benchmark interest rate to a record low of 1 percent and started buying as much as 60 billion euros ($84.6 billion) of covered bonds to stimulate lending.

The International Monetary Fund said in a report yesterday that the ECB should maintain its “accommodative” stance “as long as disinflationary pressures persist.” The ECB key rate’s 1 percent level should not be considered a “floor,” said Marek Belka, head of the Washington-based IMF’s European department.

‘This Possibility’

“We do not see deflation as imminent,” Belka said. “But we shouldn’t completely exclude this possibility.”

German consumer prices fell in July from a year earlier for the first time in 22 years, data showed this week. Spain and Ireland have experienced annual price declines since March as Tesco Plc and Marks & Spencer Group Plc have reduced prices in their Irish stores.

Lower oil prices contributed to a 54 percent drop in second-quarter earnings at Total SA, Europe’s third-largest oil producer, the Paris-based company said today. Laurent-Perrier SA, the maker of Grand Siecle champagne, may see profitability decline as consumers switch to cheaper vintages, Chief Executive Officer Stephane Tsassis said in an interview.

Metro AG, Germany’s largest retailer, said on July 17 that it plans to charge less on 5,000 items at its Cash & Carry unit, and said the same day that it would cut 1,340 jobs.

Jobless Rate

Unemployment in the euro region increased by 3.17 million people in the year through June and the highest jobless rate was in Spain, at 18.1 percent, according to today’s report. Most Europeans think the worst of the crisis is still to come and a third of workers are “very concerned” about losing their jobs, a survey published on July 24 by the European Commission showed.

The inflation report released today is an estimate. The statistics office will publish a detailed breakdown of the consumer-price data, including energy-price inflation as well as the core rate, on Aug. 14.

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