Euro Zone Inflation Falls to Zero in May

A hefty drop in oil costs brought euro zone inflation to its first ever standstill in May, data confirmed on Tuesday, and economists expect consumer prices to start falling in June.

But despite the depth of the recession and a sharp rise in unemployment, wages in the 16-country area grew during the first quarter at almost the same pace as a year earlier, helping potential household demand.

Consumer prices grew by 0.1 percent month-on-month in May and were unchanged year-on-year.

Energy prices rose 0.4 percent on the month and fell 11.6 percent on the year, European Union statistics office Eurostat said.

"Inflation is likely to turn negative this summer as energy and food-related base effects should continue to exert further downward pressures," said Clemente de Lucia, economist at BNP Paribas.

"Inflation should then moderately rebound over the last quarter of the year as base effects will operate in the opposite direction. By contrast, core inflation should continue to ease," de Lucia said.

What the European Central Bank calls core inflation — price growth excluding energy and unprocessed food — was zero on the month and 1.5 percent year-on-year, down from 1.7 percent in April.

"Contracting demand, large spare capacity and rising unemployment should continue to push down core inflation over the coming months," de Lucia said.

Armando Franca / AP Flags of member states of the European Union.

Employment in the euro zone dropped by a record 1.22 million jobs in the first quarter of 2009.

Another measure of core inflation that economists often look at and which excludes energy, food, alcohol and tobacco prices fell to 1.5 percent year-on-year from 1.8 percent.

Belgium, Ireland, France, Spain, Luxembourg and Portugal saw consumer prices fall in May and economists expect their ranks to be swelled by other countries in June.

The ECB, which wants annual inflation to be just below 2 percent, cut its main refinancing rate to a record low of 1 percent in May to help the flow of credit in the economy.

Wage Boost

A slightly positive signal for recovery prospects came from the data on wages, which rose 3.6 percent year-on-year in January-March, only marginally below the 3.7 percent growth in the first quarter of 2008.

While more money in workers' pockets is good for consumption in general, economists said unemployment trends were more important because those who had kept their job so far could be worried they might lose it soon and rein in spending.

"Wages do take time to react to the slack in the labor market," said Giada Giani, economist at Citigroup, noting the first-quarter wage growth had benefited from the impetus of 2008 when increases in pay accelerated.

"The movement in the labor market and the rise in unemployment is far more relevant than the wages," Giani said.

Unemployment in the euro zone rose to an almost 10-year high of 9.2 percent in April.

Wage growth in Germany, the euro zone's biggest economy, jumped to 6.1 percent year-on-year and total labor costs rose 6.6 percent in the first quarter, almost 2.5 times faster than in the first quarter of 2008 and faster than the 4.8 percent jump in the last quarter of 2008.

In Spain, the euro zone's fourth-biggest economy, wage growth showed little impact from surging unemployment in the first quarter with salaries rising 3.3 percent. Wages in France and Greece fell.

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