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European Deflation Drives Euro Lower

The euro zone fell into outright deflation in February complicating the European Central Bank’s policy outlook and adding to the pressure on President Mario Draghi and the governors to act at the bank meeting next Thursday.

Consumer inflation in the 19-member currency union dropped to -0.2 percent in the year to February, a sharp decline from the 0.3 percent rate in January, according to Eurostat, the statistical arm of the European Commission. Price changes had been forecast to be flat. This is the worst reading on prices since December, January and February last year. Recent inflation seems to be headed away from the ECB's 2 percent target.

The European Central bank follows the overall consumer price index, sometimes called headline inflation, unlike its American counterpart which tracks core inflation that is excluding food and energy prices.

Europe zone core inflation was 0.7 percent annually in February down from 1 percent in the prior month. These are the lowest readings since last February and April. Core inflation had been predicted to come in a 0.9 percent. 

The inflation background comes just over a week before ECB governors meet in Frankfurt to review policy at their regularly scheduled meeting. Mr. Draghi has repeatedly said that the bank will provide as much monetary stimulus as necessary to meet its economic and inflation goals. 

Inflation has fallen short of the central bank’s 2 percent goal for over three years as crude oil prices have fallen by more than half and the European economies have failed to generate any sustained growth. 

The euro fell as low as 1.0860 in New York trading after the report, and closed at 1.0877, down 0.4 percent in the day as the market anticipates greater bond and securities purchases form the ECB

The EMU numbers came after similarly weak data from Germany, France, Italy and Spain.

In Germany, the European Union-harmonized inflation rate that uses the same methodology for all countries, fell to minus 0.2 percent from 0.4 percent. The rate in France slipped to negative 0.1 percent, and Spanish prices dropped 0.9 percent. Italian CPI came in at -0.2 percent. All the inflation statistics were worse than economists had forecast. 

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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