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Euro Zone July Prices Fall by More than Forecast

Prices in the 16 countries that use the euro fell on an annual basis for the second straight month in July and by more than previously anticipated, official figures showed Friday.

The European Union's statistics office Eurostat said consumer prices in the euro zone fell by 0.7 percent in July from the previous year, 0.1 percentage point more than it had previously estimated and ahead of June's 0.1 percent fall. The monthly decline was also 0.7 percent.

Eurostat said the biggest drop was recorded in Ireland, which saw prices slide 2.6 percent in the year to July.

It said a 5.5 percent decline in transport cost, related to lower year-on-year energy prices, was the main influence behind the further fall in overall prices. A year ago, oil prices were trading at an all-time high of around $147 a barrel, compared with the July average rate of around $65.

The only members of the euro zone to post rising prices in the year to July were Greece, Malta, Slovakia and Finland.

Germany, the euro zone's largest economy, saw prices fall by 0.7 percent in the year to July.

Friday's figures are unlikely to cause too much concern at the European Central Bank, which has predicted a short period of negative inflation before the downward pressure coming from oil prices disappears as last year's sharp increases drop out of the annual comparison.

As a result, outright deflation — where prices fall consistently over a period of time and can cause a further downturn in the economy — is not the consensus view both within the markets and at the European Central Bank.

"While in recessionary conditions the absence of any inflation pressures may cause alarm, the fact that both Germany and France unexpectedly returned to growth in the second quarter underpins the ECB's predictions that the negative price pressures will be temporary," said Jane Foley, research director at Forex.com.

Inflationary pressures are not expected to emerge any time soon despite an improving growth backdrop as higher unemployment will continue to lower the ability of workers or unions to negotiate big wage increases — and with a time lag between rising unemployment and wages, this downward pressure on inflation may continue for a long time to come.

"Given that economic output in many member states is significantly below its potential, prices are likely to stay subdued for some time," said Jorg Radeke, economist at the Centre for Economic and Business Research.

The worry for many economies, such as Ireland and Spain, which are suffering housing related economic slumps as well as above average price declines, is that the European Central Bank will decide to raise interest rates far sooner than they would like: what may in a year's time be good for France and Germany may be catastrophic for Ireland and Spain.

Radeke reckons that the European Central Bank may start raising interest rates as soon as the second quarter of 2010 and that would be "bad news for the Irish and Spanish economies, which are still battling with their housing market and construction hangover."

The EU as a whole, including countries that don't use the euro such as Britain and Sweden, saw prices rise by 0.2 percent, down from 0.6 percent in June.

The EU rate has remained positive, partly because Britain's inflation rate remains positive despite recent falls, and because many of the East European countries not in the euro zone continue to have relatively high inflation rates. Romania, for example, had inflation of 5 percent in July, while Poland's stood at 4.5 percent.

Contact Europe: Economy

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