A steep fall in energy costs brought down euro zone producer prices faster than expected in January, data showed this morning, underlining deflationary risks ahead of the European Central Bank’s policy meeting on Thursday.

Prices at factory gates in the 18 countries sharing the single currency dropped 0.3 per cent in January against December mainly because of a 1.4 per cent fall in costs of energy, the EU’s statistics office Eurostat said.

Compared with the same period of the last year, producer prices fell 1.4 per cent against market expectations of a 1.3 per cent drop, showing its biggest slump since December 2009 when prices fell 3 per cent.

Producer prices are an indication of inflationary pressures early in the pipeline because unless absorbed by retailers, they eventually translate into consumer inflation, which the European Central Bank wants to keep below, but close to 2 per cent.

The ECB is poised to take action on Thursday to ease lending conditions and drag consumer inflation out of a “danger zone” below 1 per cent year-on-year, that threatens the bloc’s fragile recovery.

Adjusted for energy, producer prices rose 0.1 on the month in January after being flat in December.

There were only five euro zone countries where prices at factory gates rose in January month-on-month, led by a 1.1 per cent growth in Estonia and followed by the bloc’s newest member Latvia showing a 1 per cent increase.

In Europe’s largest economy Germany producer prices fell 0.1 per cent in January, after a 0.1 percent rise in the previous month.

In the bloc’s southern periphery, which is slowly regaining competitiveness through years austerity policies, the picture was mixed: prices in Greece grew 0.3 per cent month-on-month while Spain saw a 1.3 per cent drop in January against December.

Reuters