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Euro zone starts slide down inflation slope as coronavirus lockdowns weigh

Kitco News

BRUSSELS/FRANKFURT (Reuters) - Euro zone inflation plunged this month on crashing oil prices, signalling the start of a possible deflationary spiral as government lockdowns in response to the coronavirus trigger a dramatic slowdown in economic activity.

Inflation in the 19 countries sharing the euro fell to 0.7% from 1.2% in February, Eurostat said on Tuesday, undershooting already modest expectations of 0.8%.

But the headline figure, which many economists expect to slip into negative territory before mid-year as the epidemic continues to spread, is also masking opposing trends that may worry households: sharply higher food prices and plunging energy costs.

With Brent crude LCOc1 down by two-thirds since the start of the year on a price war between Russia and Saudi Arabia, energy costs, fell more than 4% compared to a year earlier.

But food price inflation accelerated to 3.5% from 2.6%, extending a rise that may be aggravated by lockdown measures that could make it difficult for food products to reach the consumer.

The United Nation’s Food and Agriculture Organization has warned that restrictions could make it difficult for seasonal workers to move around and for finished products to be shipped, putting upward pressure on food prices.

But the counterweight from cheap oil and subdued activity is likely to be greater, keeping inflation well below the European Central Bank’s target of almost 2%, a mark it has failed to hit for nearly a decade now.

While the ECB normally looks past fluctuations caused by energy price swings, the current crisis is unlike any it has faced.

Hoping to mitigate these impacts, it has already approved emergency measures including up to 1.1 trillion euros ($1.21 trillion) worth of debt purchases this year, all in the hope of containing borrowing costs for businesses and governments.

In a likely sign of deeper inflation problems, underlying inflation also took a dip, mostly on a fall in services prices.

Excluding food and energy - a measure the ECB calls core inflation and watches closely in policy decisions - prices grew 1.2% in annual terms, as expected, down from 1.3% in February.

An even narrower inflation measure excluding also alcohol and tobacco prices - which many market economists look at - slowed to 1.0% from 1.2%. Economists had expected a slowdown to 1.1%.

($1 = 0.9109 euros)

Reporting by Jan Strupczewski and Balazs Koranyi; editing by Francesco Guarascio and John Stonestreet

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