Eurozone price fall slows

Consumer prices in the 16 eurozone countries fell by 0.2 per cent in August over 12 months - markedly smaller than the record 0.7 per cent fall registered in July, EU data showed yesterday.

Preliminary August figures from the official Eurostat EU data agency marked the third month of a drop in prices - which is the first ever decline since the euro bloc was formed in 1999 - and a remarkable U-turn for Europe's economy.

The downward trend began in June with a 0.1 per cent fall in prices across the bloc.

After hitting a record high of four per cent in June and July 2008, eurozone inflation has fallen sharply as oil and other commodity prices have collapsed in the face of the global economic downturn.

The consumer credit crunch has also hit spending, and therefore prices.

Most economists expected that eurozone inflation would dip briefly into negative territory but they have ruled out a longer downward spiral in prices like the one during Japan's "lost decade" in the 1990s.

The markedly reduced rate of price falls in August is "clearly primarily due to oil prices falling at a significantly reduced rate year-on-year," said Howard Archer, chief European economist at IHS Global Insight.

"It seems highly probable that July marked the deepest deflation in the Eurozone and consumer prices will turn positive year-on-year within the next couple of months," he added.

Nevertheless, eurozone consumer price inflation seems highly likely to remain below the ECB's target of close to, but just below, two per cent for some considerable time to come.

This is "due to underlying inflationary pressures being held down by large and still expanding output gaps across the region, low capacity utilization, high and rising unemployment, muted wage growth and a relatively strong euro," said Mr Archer.

While the prospect of falling prices may delight consumers, it can wreak havoc on the broader economy as households put off purchases hoping for future bargains, undermining demand and investment in new production.