Bloomberg News

Euro-Area Inflation Slowed for Second Month in May on Energy

June 14, 2012

Euro-area inflation slowed for a second month in May, led by cooling prices for energy and food.

The inflation rate in the 17-nation euro area fell to 2.4 percent from 2.6 percent in April, the European Union’s statistics office in Luxembourg said today. That’s in line with an initial estimate published on May 31. Energy prices rose 7.3 percent, down from 8.1 percent a month earlier, while food cost growth slowed to 2.3 percent from 2.7 percent.

Crude-oil prices have dropped about 19 percent in the past two months, while global food costs had their biggest decline in more than two years in May, easing inflation pressures. The euro has fallen 6 percent against the dollar in the second quarter as the sovereign debt crisis worsens, raising the cost of goods imported to the 17-nation single-currency area.

“Disinflation is ongoing, but very gradually, and the falling euro is slowing down the process,” Michel Martinez, an economist at Societe Generale in Paris, said in a research note.

From the previous month, consumer prices fell 0.1 percent, today’s report showed. Euro-area core inflation, which excludes volatile costs such as energy, held at 1.6 percent.

Data yesterday showed industrial production in the region dropped 0.8 percent in April, a second consecutive decline, adding to signs of a deepening economic slump. The Frankfurt- based European Central Bank forecast on June 6 that the economy will shrink 0.1 percent this year and lowered its projection for 2013 to 1 percent from 1.1 percent.

Price Stability

The ECB, which aims to keep inflation just below 2 percent, maintained its benchmark rate at 1 percent this month. Policy makers also forecast that inflation will average 2.4 percent this year and 1.6 percent in 2013.

“While inflation rates are likely to stay above 2 percent for the remainder of 2012, over the policy-relevant horizon we expect price developments to remain in line with price stability,” ECB President Mario Draghi said the day the forecasts were announced.

Still, Bundesbank board member Andreas Dombret said on June 12 that the ECB’s long-term loans carry price risks that might exacerbate the crisis.

“Over the medium to long term, continued provision of ample liquidity might, through various channels, de-anchor inflation expectations, which would translate into higher inflation risks,” Dombret said in a speech in London. “It could also pave the way for new asset bubbles, thereby sowing the seeds of the next crisis.”

Nominal hourly labor costs in the euro area rose 2 percent in the first quarter from the year-earlier period, a separate report showed today.

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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