Reports trigger deflation alarm

The latest figures from the Organisation for Economic Co-operation and Development (OECD) have spurred fears of deflation in America and Japan.

This story was updated at 14.50

The latest figures from the Organisation for Economic Co-operation and Development (OECD) have spurred fears of deflation in America and Japan.

Eurostat, the statistical office of the European Communities, forecasts that the eurozone will also move into deflationary territory during June.

Consumer prices in the OECD area rose by 0.1% in the year to May, compared with 0.6% in the year to April. The increase follows a sharp fall in annual inflation since its peak of 4.9% in July last year.

On a monthly basis, prices rose by 0.2% in May, unchanged from April. According to the OECD, consumer prices for energy dropped by 16.3% following a fall of 13.5% in April. Food prices rose by 2.7%, compared with 3.4% in April.

In America, the consumer price index (CPI) fell 1.3% over the year to May, the third continuous month of decline. Consumer prices also fell in Japan, which recorded a 1.1% fall, the fourth straight month of decline. France recorded a decline of 0.3%.

Over the year to May, annual inflation was 2.2% in Britain, 0.9% in Italy, 0.1% in Canada, and flat in Germany.

In the eurozone, the corresponding harmonised index of consumer prices (HICP), showed annual inflation was flat in May, down from 0.6% in April. Month-on-month, the HICP rose by 0.1%, compared with a rise of 0.4% in April.

However, Eurostat today says in a Flash Estimate that it expects 0.1% annual deflation in June. While the figures are unconfirmed, Howard Archer, the chief European economist at IHS Global Insight, says that deflation in June will be no surprise to the European Central Bank (ECB). The bank therefore needs to be on its guard that it does not become established.

Should there be any faltering in the current signs that a rate of eurozone economic contraction is slowing substantially, Archer says, the ECB has ample scope to keep interest rates down at 1% for an extended period, or to cut them even further.

“The ECB also has scope to take additional non-standard measures to boost economic activity if it appears that banks are still not markedly stepping up their lending to businesses and consumers,” he writes in today’s IHS Global Insight’s view.

Recently, the ECB lent banks a record €442 billion (£376.3 billion) for one year at a fixed-interest rate of 1%. According to Archer, ECB officials have now also indicated that if banks do not step up their lending, it could bypass the commercial banks and take more direct measures. Archer says the ECB is also planning to imminently start buying euro denominated covered bonds issued in the eurozone, with the programme currently planned to amount to €60 billion.

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