Eurozone Inflation Rate Eased in June

By Paul Hannon 

        The eurozone's annual rate of inflation eased in June as consumer prices barely rose from their year-ago levels, a reminder that the risk of a slide into deflation hasn't been eliminated.
        Surveys of businesses and economic data suggest the eurozone economy continued to grow in the second quarter, although likely at the same modest pace as in the previous six months.
        However, should Greece be forced to leave the eurozone following a referendum to be held on July 5, that recovery could be put at risk if business confidence in the remainder of the currency area takes a hit, or borrowing costs in other members that have high levels of debt rise.
        A return to economic stagnation, or outright contraction, could see prices start to fall again.
        After a long, steady decline in the inflation rate, consumer prices first fell below their year-ago levels in December. The next month, the European Central Bank announced the launch of a program of quantitative easing, under which it would buy more than EUR1 trillion ($1.1 trillion) of mostly government bonds. It launched the program in March.
        Eurozone consumer prices rose for the first time in six months during May, a victory for the ECB in its campaign to avoid a debilitating period of deflation, during which businesses and households might hold back on spending in the expectation that they will get better deals in the future.
        The European Union's statistics agency Tuesday said consumer prices in June were 0.2% higher than a year earlier, a reduction in the rate of inflation from 0.3% in May, and further away from the ECB's target of just under 2%.
        "Today's data provide further justification for the ECB to complete its QE program in full and we still suspect that additional monetary policy support will be needed to bring inflation anywhere near target," said Jennifer McKeown, an economist at Capital Economics.
        Excluding prices for energy, food and alcohol that are largely beyond the ECB's influence, inflation also eased. The core annual rate dropped to 0.8% from 0.9% as the rise in services prices slowed to 1.0% from 1.3% on the year.
        However, without a setback such as Greece's departure from the currency area, the inflation rate seems set to pick up slowly in the eurozone.
        As the unemployment rate edges down gradually, wage rises have started to pick up. Eurostat Tuesday said the number of people without jobs in the 19 members of the eurozone fell by 35,000 in May to 17.7 million. While the unemployment rate was unchanged on the month at 11.1%, it was down from 11.6% in May 2014.
        That boost to earnings has been reflected in increased retail sales, an indication that strengthening consumer demand is likely to push prices higher. Figures also released Tuesday showed German retail sales expanded by 0.5% in May, supporting the expectation that private consumption is likely to remain a solid pillar of growth in Europe's largest economy.
        German jobless claims dropped further in June, underpinning workers' bargaining power in current wage negotiations. The BA labor agency said Tuesday that jobless claims in June were down 1,000 from May when taking account of seasonal swings, their ninth consecutive fall. In a contrast that highlights the problems threatening to fragment the eurozone, Germany's 4.7% unemployment rate in May was less than a fifth of the Greek unemployment rate, which stood at 25.6% in March, the most recent month for which figures were available.
        Without renewed drops in world energy prices or a sharp slowing of the economy, economists expect inflation figures in the second half of this year to climb steadily, while remaining far below the ECB's target of just under 2%.
        Emese Bartha and Nina Adam in Frankfurt contributed to this article.
        Write to Paul Hannon at paul.hannon@wsj.com
        (END) Dow Jones Newswires

        June 30, 2015 06:44 ET (10:44 GMT)

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