Eurozone consumer prices down but optimism grows

Slowing price falls prompt economists to predict growth by end of the year

The eurozone was hit by its third month of falling prices in August, although the better month-on-month performance led economists to predict a return to growth by the end of 2009.

This was offset by falling confidence in China which sent markets around the world tumbling. Eurostat, the statistical office of the European Commission, yesterday announced that consumer prices among the 16 countries that use the euro fell 0.2 per cent last month.

It remains short of the European Central Bank's target for inflation of just below 2 per cent, although yesterday's figures beat the consensus of a 0.4 per cent decline. The ECB's interest rate-setting committee will scrutinise the data on Thursday, but experts believe it is unlikely to change the rate, currently at a record low of 1 per cent.

The official reasons behind the negative inflation will be revealed on 16 September after the data has been fully analysed. However, economists said yesterday that much of the trend is down to the decline in the oil price, which has plunged in the past 12 months, as well as the ongoing weakness in consumer demand and unemployment.

Jörg Kramer, chief economist at Commerzbank, said: "The drop in inflation was primarily down to falling energy prices, I would say about 80 and 90 per cent of it." He added that core inflation, which excludes energy, food and alcohol and tobacco, had seen a downward trend "brought on by the sharp recession".

The region went negative in June, when prices fell 0.1 per cent. Yesterday's Eurostat figures mark a better performance than July, when the falls to prices hit a record minus 0.7 per cent.

The slowing decline cheered economists, who are now more confident that inflation is set to go positive and that the spectre of deflation has retreated. "We think headline inflation will go positive, to 0.1 per cent, by the end of the year," Mr Kramer said, adding: "The news is positive. You can never completely rule out deflation, but we are heading in the right direction."

Optimism has been growing in the eurozone. A survey by the European Commission released last week showed that economic sentiment had risen to 80.6 points in August from 76 the previous month, the fifth straight rise.

This comes as Italy's prices rose 0.2 per cent, according to the Italian Institute of Statistics. The improved performance follows strong inflation data from Germany, which rose to zero after support from the energy price.

Yesterday, there was also unexpectedly positive economic data from India and South Korea. GDP expanded 6.1 per cent last quarter in India, up from 5.8 per cent in the previous three months. In South Korea, industrial output posted the first growth in 10 months.

The mood was dampened, however, as shares in China dived over fears for the pace of economic recovery. The market fell almost 7 per cent to a three-month low on negative sentiment around the country. The knock-on effect not only hit shares in the commodity companies – China is the second largest oil consumer, and also one of the largest metals importers – but also weighed on markets around the world.