Euro zone inflation fell to a 52-month low in March, increasing the pressure on the European Central Bank (ECB) to act and ward off the risk of deflation at this Thursday's monetary policy meeting.
Consumer prices rose by 0.5 percent year-on-year in March, according to official statistics released by Eurostat Monday, as core inflation fell to 0.8 percent from 1 percent. The consumer price figure marked the lowest level since November 2009, and was below the 0.6 percent expected by analysts.
The euro fell against the dollar immediately after the data were published, but reversed gains soon after and by 11:00 a.m. London time was 0.25 percent higher. The FTSEurofirst, meanwhile, extended gains.
Howard Archer, chief euro zone economist at IHS Global Insight, described the news as "uncomfortable and unwelcome" for the ECB.
"We had been increasingly leaning towards the view that the ECB is done on stimulative action, but the further dip in euro zone consumer price inflation to just 0.5 percent in March ramps up the pressure on the ECB to act," he said in a note, highlighting too that the euro had recently strengthened to a 30-month high and that lending to businesses had continued to fall in February.
One result of deflation is to push down demand, as people hold off purchases in the hope of more price declines. It can also cause increased unemployment and even lead to economic depression.
Ben May, European economist at Capital Economics, stressed that the slide in inflation may reflect temporary factors relating to the timing of Easter, but added: "the weakness of inflation suggests that the ECB may need to take further policy action."