Euro zone price fall slows as expected, deflation fears ease

[March 31, 2015]  By Jan Strupczewski

BRUSSELS (Reuters) - Euro zone consumer prices fell again in March, as expected, but the decline was the smallest this year, indicating the price of goods and services could start rising again soon.

Meanwhile, the region's unemployment rate fell to its lowest in almost three years, a sign the economy is picking up steam and inflation is likely to rise.

Consumer prices in the 19 countries sharing the euro fell 0.1 percent year-on-year this month, the European Union's statistics office Eurostat estimated. Prices fell 0.3 percent in February and 0.6 percent in January.

The bottoming out of price declines is likely to be welcome news for the European Central Bank, which wants to keep inflation below, but close to 2 percent over the medium term. It started printing money in March to inject more cash into the economy and ward off concerns of persistently falling prices, or deflation.

"Inflation will soon flatten out, and will turn clearly positive in the second half of the year," said Nick Kounis, head macro and financial markets research at ABN AMR.

"The drag from energy will ease in the coming months, while food price inflation (now unusually weak) is likely to gradually edge up as it follows developments in agricultural prices with a long lag," he said.

"Finally, later in the year – and more so in 2016 – the impact of the weaker euro will feed through. Overall, then we look to be in a world of ‘lowflation’ rather than ‘deflation’," Kounis said.

As in previous months, the decline was mainly driven by a drop in the price of energy, which was 5.8 percent cheaper in March than a year earlier.

Core inflation, which excludes volatile energy and unprocessed food costs, was 0.6 percent year-on-year, down from 0.7 percent in February and the same as in January.

"The data will likely dilute fears that deflation could become entrenched in the euro zone with long-term debilitating growth effects," said Howard Archer, economist at IHS Global Insight.

"In fact, it may not be long before the markets start seriously questioning whether the ECB will continue to fully enact its quantitative easing programme all the way through to September 2016," Archer said.

In another positive sign for the euro zone economy, Eurostat said euro zone unemployment fell to 11.3 percent of the workforce in February from an upwardly revised 11.4 in January -- the lowest rate since May 2012.

Eurostat said 18.204 million people were without jobs in the euro zone in February, 49,000 people fewer than a month earlier.

(Reporting By Jan Strupczewski; Editing by Philip Blenkinsop, Larry King)

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