Eurozone inflation falls more than expected in May

May 31, 2012 - 12:16 PM

LONDON (AP) — Inflation across the 17 countries that use the euro fell by more than anticipated in May, official figures showed Thursday - a development that will likely add pressure on the European Central Bank to cut interest rates next week.

In its first estimate, Eurostat, the European Union's statistics office, said annual consumer price increases slowed to a 15-month low of 2.4 percent in May from 2.6 percent the previous month. The expectation in the markets was for a more modest decline to 2.5 percent.

Though inflation is still running above the ECB's target of keeping price increases below 2 percent, the central bank is under pressure to lower its main benchmark rate from the current 1 percent to help the ailing eurozone economy.

If it does cut interest rates, it will be the first time in the 13-year history of the ECB that the main benchmark rate will fall below 1 percent.

Eurostat provided no reasons why inflation fell - more details will be provided on June 14. However, lower energy prices and weak economic activity are thought to be behind the fall.

Though recent figures showed that the eurozone as a whole managed to post flat growth in the first quarter of the year, seven of the euro's members are in recession, officially defined as two consecutive quarters of negative growth.

There are huge disparities in the currency bloc, with Germany managing to eke out solid growth as its high-value exporters continue to benefit from the rebound in global trade in spite of the debt crisis on their doorstep.

Other countries, notably those at the frontline of the debt crisis - such as Greece, Spain, and Italy - are seeing their economies shrink as governments take often drastic measures to get their public finances into shape.

"Pressure on the ECB to take interest rates below 1 percent sooner rather than later is mounting from the deteriorating economic environment and threat to activity coming from the heightened tensions and uncertainty over Greece and Spain," said Howard Archer, chief European economist at IHS Global Insight.

Even if the ECB opts to keep interest rates steady, the drop in the inflation rate could help shore up economies across the eurozone by easing the squeeze on consumers' purchasing power.

Though many economists think that price gains in energy and food will continue to slow over the rest of the year, the recent sharp decline in the value of the euro itself may prevent inflation from falling quickly later in the year. The drop in the euro, which is trading near two-year lows around $1.24, will make life a little bit easier for hard-pressed exporters across the eurozone, but it will also tend to raise the cost of imports from outside the bloc.