Eurozone Prices Steady After Four Months of Decline

By Paul Hannon 

        Eurozone consumer prices stopped falling in April, further easing fears that a slide into deflation could derail the currency area's fragile economic recovery.
        The European Union statistics agency Eurostat on Thursday said consumer prices were unchanged from a year earlier, having fallen in each month since December.
        That fall in prices prompted the European Central Bank to launch a program of quantitative easing earlier this year. Under the program the ECB will buy more than EUR1 trillion ($1.11 trillion) of mostly government bonds by September 2016.
        The central bank feared that the collapse in energy prices toward the end of last year would lead to declines in the prices of other goods and services. That in turn could have triggered a deflationary spiral, during which consumers and businesses delay spending, damping economic growth.
        "It's quite clear that our monetary policy stance avoided that risk," ECB President Mario Draghi said at a news conference earlier this month.
        With the halt of price declines, inflation seems likely to return to the eurozone a little earlier than the ECB had expected, and is a further indication that QE is helping to keep the recovery on track.
        However, the prospect of an earlier-than-expected end to the period of falling prices has already led to speculation in financial markets that the ECB may end its bond purchases earlier than planned, or buy smaller amounts of debt.
        "Things are developing slightly more positively than expected a few months ago," ECB governing council member Ardo Hansson said in an interview with The Wall Street Journal on Wednesday.
        But he said it is "premature" to discuss whether the ECB should end its QE program earlier than intended.
        The stabilization in the index of consumer prices--a broad measure of inflation--largely reflects a partial rebound in energy prices, which were 5.8% lower than a year earlier in April, having been down 6.0% in March.
        Excluding prices for energy, food and alcohol, inflation remained very low. The core annual rate was unchanged at 0.6%, remaining at the record low reached in January. Services prices rose by 0.9% on the year, the lowest rate of increase on record and a sign that weak demand is damping prices.
        Europe is an importer of energy and economists often compare a fall in prices of oil and natural gas to a tax cut, as it leaves consumers with more money to spend on other goods and services, many of which are produced within the bloc.
        Rather than push the eurozone into a deflationary spiral, lower energy costs appear to have delivered a boost to the currency area's still modest economic recovery, helped by the ECB's stimulus, and the weakening euro.
        Spain's statistics agency Thursday said the country's economy expanded by 0.9% in the first three months of 2015, the fastest quarter-to-quarter growth rate in seven years.
        Belgium on Wednesday reported that its economy also accelerated in the first quarter, while Austria said on Thursday it returned to very modest growth from stagnation during that period. Howard Archer, an economist at IHS Economics, said that combination suggests the eurozone's economy grew by 0.5%, up from 0.3% in the final three months of 2015.
        But there are signs that the boost from lower oil prices is starting to fade. Retail sales in Germany fell by a surprisingly large 2.3% in March, while French consumer spending dropped by 0.6% following four months of increases.
        In addition, high rates of unemployment and weak growth in wages are likely to dampen prices for many months to come.
        Eurostat on Thursday said the eurozone's rate of unemployment was unchanged in March at 11.3%, still well above the rates recorded before the financial crisis. Eurostat said the number of people without work fell by 36,000 during the month, leaving 18.1 million people without work.
        With demand weak, a fresh decline in energy prices could revive the threat of deflation.
        "With core inflation still low, there remains a risk of a more damaging and sustained bout of deflation in the eurozone as a whole," said Jonathan Loynes, chief European economist at Capital Economics.
        Write to Paul Hannon at paul.hannon@wsj.com
        (END) Dow Jones Newswires

        April 30, 2015 06:03 ET (10:03 GMT)