Euro zone inflation at lowest level in almost four years

Falling fuel and telecoms prices pulled euro zone inflation down to its lowest level in almost four years in October, data showed today, fleshing out the surprise drop that prompted the European Central Bank to cut interest rates to a record low.

Consumer price inflation in the 17 nations sharing the euro was 0.7 per cent last month, the EU's statistics office Eurostat said, confirming its earlier estimate that is far below the ECB target of just under 2 per cent.

On an annual basis, falling fuel costs for heating and transport, as well as telecoms, had the biggest impact on the inflation rate, offsetting rises in electricity and rent.

Heating oil fell by the most in October compared to the year earlier period, followed by fuels and then telecoms, Eurostat said.

After Eurostat released its flash reading on October 31st, the ECB cut its main refinancing rate on November 7th by 25 basis points to 0.25 per cent, warning of the risk of “a prolonged period of low inflation” as the euro zone struggles to recover from recession.

The inflation rate dropped below 1 per cent for the first time since February 2010. Stripping out volatile energy and food and tobacco costs, inflation was 0.8 per cent in October.

Europe is yet to face a negative inflation rate or a Japanese-style deflationary spiral when falling prices weaken demand, leading to wage cuts and even lower prices.

But consumer prices actually fell in October from September, by 0.1 per cent, Eurostat said in its more detailed reading that laid out the pace of prices rises and falls across all sectors.

Making the ECB’s job all the harder, inflation varied widely across the euro zone, ranging from outright deflation in Ireland, Cyprus and Greece to inflation of 1.2 per cent in Germany, 1.7 per cent in Finland and 2.2 per cent in Estonia, the highest annual rate in the region.

France, Belgium and Slovakia registered inflation at same level as the euro zone’s average rate of 0.7 per cent. (Reuters)