EU: plunging oil price behind June disinflation

BRUSSELS — Plunging oil prices sent euro-zone inflation negative in June, the EU statistics agency Eurostat said Wednesday.

It confirmed a June 30 estimate that the 16 nations that use the euro saw prices contract 0.1 percent in the year to June — the first month the region has experienced disinflation since the euro launched in 1999.

Far lower prices for transport fuel and heating oil were the main factors behind the drop, Eurostat said, outweighing higher prices for restaurants and cafes, tobacco, rent and electricity.

Oil prices rocketed to a record $147 a barrel last July and have now fallen to by more than half to $60 a barrel on Wednesday as demand collapsed during the global economic downturn.

European Central Bank officials say the euro area does not need to worry in the longer term about a deflationary spiral — when falling prices push consumers to put off spending, in turn causing retailers to slash prices — because any fall is likely to be temporary and linked to the drop in the oil price.

Prices can fall for a short time without harming the economy, but full-scale deflation can result in a vicious circle of declining demand, worsening debt and job losses, as happened during the Great Depression of the 1930s.

Six euro nations reported negative inflation in June. Ireland saw the sharpest drop in prices in June, down 2.2 percent on an annual basis. Portugal’s was down 1.6 percent. Belgium, Spain and Luxembourg all saw 1 percent disinflation rates, while Austrian prices shrank 0.3 percent.

Germany, the region’s largest economy, saw inflation freeze at 0 percent. Eurostat did not have June figures for France, the second biggest euro economy.

Across the entire 27-nation European Union, the annual inflation rate was 0.6 percent and far higher in several eastern European nations. It was 5.9 percent in Romania, 4.2 percent in Poland and 3.9 percent in Lithuania. Inflation was 1.8 percent in Britain, the largest EU economy outside the euro-zone.