Euro-area inflation rate seen heading back to zero again

[FRANKFURT] The euro area's inflation rateprobably slipped back to zero this month, ending a brief run of price gains and adding urgency to the European Central Bank's review of its stimulus.

The stagnation forecast by economists follows a 0.3 per cent increase in consumer prices in January. The deterioration may not end this month, with ECB policy makers saying that lower oil costs mean that price drops are on the cards in the coming months.

Inflation in the 19-nation area has fallen short of the ECB's goal of just under 2 per cent for almost three years, raising concerns that this will depress wages and undermine consumers' willingness to spend. Against that backdrop, the Governing Council may cut its inflation forecasts at its meeting on March 10 and loosen monetary policy again.

"The euro zone now faces one of the longest periods of zero or negative inflation in its history," HSBC Holdings economists Fabio Balboni and Rainer Sartoris said in a note on Friday.

This "increases the risk that inflation expectations could become dislodged and puts more pressure on the ECB." It's not just headline inflation that's weakening. Core price growth, which excludes volatile food and energy, probably cooled to 0.9 per cent in February from one per cent in January, according to the Bloomberg survey.

The euro-wide number will follow disappointing data from Germany, France and Spain. In Germany, the European Union harmonized inflation rate dropped to minus 0.2 per cent from 0.4 per cent. The rate in France fell to minus 0.1 per cent, while Spanishprices slid 0.9 per cent. All readings were worse than economists had forecast.

Twenty-one of the 47 economists in the Bloomberg survey forecast a euro-area rate below zero in February. Goldman Sachs sees a minus 0.1 per cent figure and predicts it could go as low as minus 0.6 per cent in the coming months.

To kickstart a revival in inflation, the ECB has already cut its deposit rate to minus 0.3 per cent and is pumping 60 billion euros (S$92 billion) a month into the economy via asset purchases.

Clemens Fuest, incoming president of the Ifo economic institute in Munich, said that loose monetary policy has allowed governments to delay reforms, which could lead to longer-term problems, and the region is "going the Japanese way."

"If you look at inflation, interest, rates, growth, it's as similar as it can be," he said in an interview last week.

"The euro zone is a different animal from Japan. But the response to the crisis and the economic impact is similar to what happened in Japan."

BLOOMBERG