Eurozone inflation falls as economies shrink | Business| Economy and finance news from a German perspective | DW | 14.06.2012
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Eurozone inflation falls as economies shrink

Inflation in the 17-nation currency area fell to a 15-month low in May amid a deepening economic and financial crisis. The drop may give the European Central Bank (ECB) some scope to lower interest rates.

The annnual inflation rate in the eurozone was down to 2.4 percent in May, after the 2.6 percent recorded in April, the European Union's statistics office, Eurostat, announced on Thursday.

Among the economic sectors reporting declining prices were communications, down 0.19 percent, while costs for rent, cars and consumer electronics remained more or less stable at minus 0.06 percent, Eurostat said.

However, prices for alcohol and tobacco were up 4.7 percent, and were the biggest contributors to overall price increases, the agency, which is based in Luxembourg added. In addition, housing and transport prices also rose by 4.0 and 3.7 percent respectively.

Crisis-hit countries in the eurozone's southern periphery recorded the lowest inflation figures. Due to severe recessions in Greece and Spain, inflation there was considerably below the EU average in May at 0.9 and 1.9 respectively.

Surprisingly, prices increases in Germany - the EU's strongest economy - also slowed in May, coming down to 1.9 percent from 2.1 percent in April, according to figures released by the German Statistics Office Wednesday.

Ironing out EU imbalances

Economists have argued that Germany should let inflation rise, through higher wages, for example, to help its weaker eurozone partners to regain competitiveness.

Furthermore, moderate inflation should give the European Central Bank (ECB) more room to manoeuvre, including by lowering interest rates to boost sluggish economic growth.

Analysts are expecting a cut in the ECB's benchmark interest rate, currently standing at a historic low of just one percent, to be announced after a bank meeting in July.

However, ECB President Mario Draghi said he expected average inflation in Europe to come in at 2.4 percent this year, which is above the ECB's "price stability" limit of 2.0 percent.

uhe/pfd (dpa, Reuters)