(Adds economists' comments)
By Jan Strupczewski
BRUSSELS, April 6 Euro zone retail sales dropped
much more than expected and producer prices fell in February,
underlining the weakness of consumer demand and waning
inflationary pressures in the contracting economy, data showed.
The European Union's statistics office said retail sales in
the 16 countries using the euro fell 0.6 percent month-on-month
in February for a year-on-year 4.0 percent decline.
Economists polled by Reuters had expected a 0.4 percent
monthly fall and a 2.5 percent annual drop.
"February's fall in euro zone retail sales confirms that
spending is not benefitting from sharp falls in inflation," said
Jennifer McKeown, economist at Capital Economics.
Eurostat said prices at factory gates in the euro zone fell
0.5 percent month-on-month in February, as expected by markets,
for a year-on-year 1.8 percent fall against forecasts of a 1.6
The main driver behind the annual fall in producer prices
was a 4.5 percent drop in energy costs, thanks to lower prices
of oil and gas.
Intermediate goods prices were down 3.1 percent and price
rises for durable consumer goods and capital goods slowed for
the fourth month in a row.
Retail sales are an indication of household demand, which
has been under pressure from the quickly rising unemployment as
the euro zone economy sinks into its worst economic crisis since
the Second World War.
"Given the rapid deterioration in labour market conditions,
consumer spending will probably remain very weak in the near
term at least, despite the relatively healthy state of household
finances," McKeown said.
Producer prices show inflationary pressures early in the
pipeline as their rise or fall is usually later reflected in
consumer prices, which the European Central Bank wants to keep
below, but close to 2 percent.
"Trends in producer prices tend to filter through to retail
prices with a lag of between 6 to 12 months," said Luigi
Speranza, economist at BNP Paribas.
"Recent trends in prices at the factory gate support our
view that core inflation at the consumer level will
progressively slow over the next few months and we expect it to
turn negative sometime next year," he said.
Consumer price growth slowed to 0.6 percent year-on-year in
March from a peak of 4.0 percent in July as a result of the
economic crisis and the ECB has cut its main refinancing rates
by a total of 300 basis points since October to 1.25 percent.
The bank has signalled it may cut borrowing costs again by a
quarter point in May and also consider other ways of monetary
policy easing to help boost demand in the economy as headline
inflation is likely to turn negative in mid-year.
(Editing by Andy Bruce)