Euro zone inflation dives as ECB poised to act

MARTIN SANTA

BRUSSELS — Reuters

Published Tuesday, Jun. 03 2014, 5:40 AM EDT

Last updated Tuesday, Jun. 03 2014, 5:40 AM EDT

Euro zone price inflation fell unexpectedly in May, increasing the risks of deflation in the currency area and sealing the case for the European Central Bank to act this week. Annual consumer inflation in the 18 countries sharing the euro fell to 0.5 per cent in May from 0.7 per cent in April, the EU’s statistics office Eurostat said on Tuesday.

Economists surveyed by Reuters expected inflation to remain at April’s level.

A clutch of senior sources told Reuters earlier this month that the ECB was preparing a package of policy options for its meeting on Thursday, including cuts in all its interest rates and targeted measures aimed at boosting lending to small– and mid-sized firms (SMEs).

The weak rate of May price rises would seem to cement expectations that the ECB will now deliver a series of measures to make it even cheaper to borrow and help the economy.

May’s reading is back at levels last seen in March – the lowest level since November 2009 and reflecting low inflation in Germany.

Inflation in the 9.5 trillion euro economy is stuck in the ECB’s ‘danger zone’ of below 1 per cent, a sign of the fragile recovery. The ECB says it stands ready to use all tools available to fend off deflation risks and aid the economy.

Core inflation, excluding energy, food, alcohol and tobacco, fell to 0.7 per cent in May from 1.0 per cent in April. Energy prices were flat on the year, showing no decline for the first time in five months.

Global financial markets have been buoyed by the odds of cheaper money in the bloc and could react sharply if the ECB does not deliver on Thursday.

In a sign of the slow economic recovery, a separate Eurostat data release showed the bloc’s unemployment dipped marginally to 11.7 per cent in April from 11.8 per cent, but still near the record high of 12 per cent registered a year ago.

Some 18.75 million of people are without jobs in the euro zone – 76,000 less than in March, the Eurostat data showed.

Joblessness has been stuck at almost 19 million people for the last four months and shows the human impact of the worst financial crisis in a generation, but it also varies widely across the euro zone.