Euro-Area Inflation Rate Falls to Zero

The euro region’s inflation rate fell to zero for the first time in at least 13 years in May as energy costs retreated and the worst recession in more than six decades prompted companies to cut prices.

The annual rate is the lowest since the data were first compiled in 1996 and is down from 0.6 percent in April, the European Union statistics office in Luxembourg said in an initial estimate today.

A 50 percent drop in energy prices over the past year is pushing down inflation just as companies are cutting jobs and prices to weather the worst global slump since World War II. In Germany, Europe’s largest economy, consumer prices unexpectedly posted the first annual decline since at least 1996 this month. Still, the risk of deflation is very limited,” European Central Bank Vice President Lucas Papademos said this week.

While official EU data go back only 13 years, RBS estimates that inflation is now at the lowest since 1953, according to its extrapolation of historical data.

Retreating oil prices have helped ease cost pressures and left companies and consumers with more money to spend. A gauge of consumers’ price expectations fell to minus 7 in May, the lowest since the indicator was created in 1990, the European Commission in Brussels said yesterday. The gauge turned negative last month for the first time.

The prospect of deflation, which hurts spending by encouraging consumers to postpone purchases, would increase pressure on the ECB to take more steps to revive the economy. The central bank this month trimmed its benchmark interest rate to 1 percent, a record low, and pledged to buy 60 billion euros ($84 billion) of covered bonds to fight the economic crisis.

Companies from retailers to utilities are trimming prices. Praktiker AG, Germany’s second-largest home-improvement retailer, has been offering customers discounts of around 20 percent this year. RWE AG, Germany’s second-biggest utility, plans to cut consumer natural-gas tariffs by up to 15 percent on July 1. Paris-based PSA Peugeot Citroen said this month that cost cuts at Europe’s No. 2 automaker are a necessary condition” to counter the crisis.

Euro-Area Inflation Rate Falls to Zero, Bloomberg
5/29/2009 8:58:59 AM