LONDON – The latest bout of falling prices across the 19-country eurozone has ended— after just a single month.
Revised figures Thursday from the European Union’s statistics agency showed that inflation was flat in the year to March. That’s up from the initial estimate of a 0.1 per cent fall and February’s 0.2 per cent annual drop.
The biggest prices increases came from restaurants and cafes while cheaper fuel was the biggest drag on inflation.
The earlier Easter in much of the eurozone may have helped the uptick, particularly in Germany, which saw inflation in March rise to 0.1 per cent from minus 0.2 per cent in February.
The upward revision is likely to provide some modest cheer to policymakers at the European Central Bank, who have backed a series of stimulus measures, such as cutting interest rates and expanding a government bond-buying plan, primarily to get inflation back to the target of just below 2 per cent.
But Alasdair Cavalla, senior economist at the Centre for Economics and Business Research, cautioned against too much optimism.
“It is important to remember the level of inflation,” said Cavalla. “Zero is not indicative of a healthy economy.”
The ECB has been worried that too-low or negative inflation could turn into deflation, a long-term drop in prices that would weigh on the already-fragile eurozone economy. Despite the flat rate for the eurozone as a whole, ten of the bloc’s countries are reporting falling prices.
A consistent drop in prices can choke the life out of an economy by enticing consumers to delay big purchases beyond everyday needs such as food and energy in the knowledge that they will cost less down the line.
And faced with lower prices, businesses also make less profit and start looking to reduce costs. That means job losses, wage cuts and a growing reluctance to invest and innovate. That hurts the economy further, potentially creating a downward spiral in which businesses have to cut costs further.
One of the drags on inflation over the past year has been the fall in oil prices, which hit 13-year lows in February. Since then, oil prices have recovered by about a third higher, which should help push up inflation.
The ECB hopes that rising wages and expectations of higher prices will also start to push up inflation, though that may take some time. The core rate, which strips out energy and the other volatile items like food, alcohol, and tobacco, picked up to 1 per cent in the year to March from 0.8 per cent the previous month.