Euro inflation sinks to minus 0.3 pct

[September 30, 2009]  BRUSSELS (AP) -- Yearly inflation in the 16 nations that use the euro slipped deeper into negative territory in September, sliding to minus 0.3 percent from minus 0.2 percent in August, according to the EU statistics agency Eurostat.

Eurozone inflation has fallen for four straight months as energy costs plunged from record highs in July 2008. It hit an all-time low at minus 0.7 percent in July.

Oil prices have tumbled sharply in recent weeks on traders' fears that U.S. consumers are still leery of spending despite a fragile economic recovery.

Eurostat did not explain the reasons for the drop but will give more details on the September figure on Oct. 15. The fall in the price index is largely a sign of weak economic activity, which slackens demand for goods -- especially oil.

Oil prices have dropped by more than half from $147 a barrel last July to $67 in Wednesday trading in Asia.

Unicredit economist Marco Valli last week said oil prices have gone down even more sharply in euro terms -- as a stronger euro buys more dollar-priced oil -- and this could also keep inflation negative in October.

European Central Bank president Jean-Claude Trichet and other EU officials say disinflation is short-lived and that it is not the start of full-scale deflation -- a downward price spiral that can harm the economy with a vicious circle of declining demand, worsening debt and job losses, as happened during the Great Depression of the 1930s.

Trichet said Monday that he expected inflation to turn positive again within coming months and "to remain subdued, within positive territory" in the near future. He said he didn't see any danger in the longer term as inflation would rise to the ECB's target of just under 2 percent.

Low inflation removes one of the main reasons for the ECB to hike borrowing costs in the euro area from a record low interest rate of 1 percent that aims at encouraging bank lending to stoke economic growth.

[Associated Press]

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