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Eurozone consumer price inflation stayed negative for the second month in July with the latest decline being the biggest on record, extending support to a low interest rate regime. Unemployment reached the highest level since June 1999 as more employers cut headcount in June.
A flash estimate from the European Union statistics office, Eurostat, revealed a 0.6% annual fall in consumer prices in July compared to a 0.1% drop in June. The decline in July was the biggest on record. Prices also dropped more than the expected 0.4%.
Inflation turned negative for the first time in June. The European Central Bank aims at inflation rates below, but close to 2% over the medium term.
The statistical office is set to release the final report on August 14.
Simon Junker, analyst at Commerzbank, expects inflation to stay negative for the coming few months, but expects a reversal in the autumn. The core rate could still ease until the end of the next year, but without crossing zero, the analyst said.
The reason behind the annual fall continue to be energy prices, which have fallen around 14% since last July. This special effect would gradually drop and inflation would then pick up again. The analyst sees inflation rate of 1.6% for 2010 compared to 0.5% this year.
Junker holds the view that the medium term inflation trend is in line with the ECB target. Besides, easing core inflation is another argument for low interest rates. The ECB should therefore retain its expansionary course of monetary policy for time to come, he said.
Elsewhere, a preliminary estimate from the Italian statistical office showed that inflation decreased to a fifty-year low of 0% in July from 0.5% in June, indicating that the rate turn negative in the coming months. Meanwhile, the EU harmonized index fell 0.1% in July from a year earlier.
Consumer prices in the largest Eurozone economy recorded the first annual decrease since March 1987. The German CPI was down 0.6% annually in July, following a 0.1% rise in June. The harmonized index of consumer prices also dipped 0.6% from the last year.
Earlier in the day, Marek Belka, director of the International Monetary Fund's European department said deflation is not imminent in Eurozone. But it should not completely rule out the possibility.
Another report from the Luxembourg-based Eurostat said the jobless rate rose to 9.4% in June from 9.3% in the previous month. This was the highest since June 1999. Economists had expected the rate to be 9.7%. The unemployment rate for May was revised from 9.5% reported on July 2.
In June, the number of unemployed persons increased 158,000 from the previous month to 14.89 million. Compared to the previous year, unemployment rose 3.2 million. In the meantime, the unemployment rate in the EU27 stood at 8.9% in June, which was the highest since June 2005. The rate in May was 8.8%. Among the member states, the lowest unemployment rates were recorded in the Netherlands and Austria. On the other hand, the highest rates were reported in Spain, Latvia and Estonia.
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