Annual consumer inflation slowed in Italy and Spain in May, heightening concerns about deflation risk in the eurozone as the bloc’s central bank gears up for an expected growth-boosting shift in monetary policy next week.
Italy’s EU-harmonised inflation rate eased to a weaker-than-expected 0.4 per cent year-on-year from 0.5 per cent in April, statistics office Istat said in Rome.
Corresponding inflation in Spain was 0.2 per cent, down from 0.3 per cent, data from the National Statistics Institute in Madrid showed.
The subdued data from the eurozone’s third and fourth largest economies, driven by lower food costs, is likely to feed into widespread expectations that the European Central Bank will ease monetary policy significantly at its meeting next Thursday.
The ECB targets annual eurozone inflation of just under 2 per cent, but it has been in the bank’s “danger zone” of below one per cent for seven months. Prices across the bloc rose just 0.7 per cent in April and data due on Tuesday is expected to show that rate stayed unchanged in May, consensus forecasts show.
Bank of Italy governor Ignazio Visco said the steep drop in inflation across the eurozone had surprised forecasters.
“This pattern has been more pronounced in the countries directly hit by the sovereign debt crisis, but it is common to the entire euro area,” he said in a speech to the annual meeting of the Italian central bank in Rome.
Visco, who also sits on the ECB Governing Council, said the central bank was determined to act next Thursday if it decided inflation would remain well below its target over the next two years, if necessary using unconventional measures.
Reuters reported earlier this month that the ECB is preparing a package of policy options for its June meeting. It includes cuts in all its interest rates as well as targeted measures aimed at boosting lending to smaller firms.
The ECB insists it sees no bloc-wide deflation threat, but some economists fear consumers in the eurozone may delay spending plans on the assumption that goods and services will get cheaper.
Commenting on yesterday’s data, Raj Badiani, economist at IHS Global Insight, said he expected Spain to experience an extended period of low inflation.
“Depressed economic and labour-market conditions will continue to squeeze wage growth and high-street prices. Retailers and service providers continue to use heavy discounting, in the face of fierce competition,” he said.
Barclays retained its 0.6 per cent forecast for May eurozone inflation following yesterday’s data. “We still see downside risks to our projection,” the bank said in a note.
Visco said core inflation in the eurozone had fallen to its lowest levels since the introduction of the single currency, while the drop in broader HICP inflation “reflects not only the fall in energy prices, compounded by the appreciation of the euro, but also the persistent weakness of the economy”.