March 3, 2020 / 12:14 PM / a month ago

Euro zone inflation slows in February; coronavirus fallout cuts energy prices

BRUSSELS (Reuters) - Euro zone consumer prices rose more slowly in February than in January, as expected, as the spread of the coronavirus around the world depressed oil prices.

Prices rose 1.2% year-on-year after a 1.4% rise in the previous month, Tuesday’s data from European Union statistics office Eurostat showed. The reading was in line with a Reuters poll of analysts.

The decline was mainly due to a 0.3% drop in energy prices. Without it, and excluding volatile unprocessed food prices, inflation accelerated to 1.4% year-on-year from 1.3% in January.

“The impact of Covid-19 on the economy will distort inflation figures in the months ahead, but it is too early to tell (how much) just yet. For now, the decline in oil prices is the most significant channel through which the virus is impacting inflation,” ING economist Bert Colijn said.

An even narrower measure of inflation that also excludes alcohol and tobacco prices and that is watched closely by many bank economists also accelerated to 1.2% from 1.1% in January.

The European Central Bank wants to keep inflation below, but close to 2% over the medium term.

“For the ECB, today’s figures will be no more than confirmation of the current modest inflation environment. For the 12 March (ECB) meeting, immediate Covid-19 measures will be much more relevant than the February inflation environment,” Colijn said.

ECB head Christine Lagarde said on Monday the ECB stood ready to take appropriate and targeted action in response to the virus. Three sources familiar with the discussion told Reuters this could involve liquidity provision to businesses hit by economic fallout from the outbreak. [nL8N2AW2OG]

The ECB expects inflation this year to slow to 1.1% before accelerating to 1.4% in 2021.

“All told, it seems likely that inflation will be a bit weaker this year than both we and the ECB had expected,” said Jessica Hinds, economist at Capital Economics.

“We expect the Bank to revise down its inflation forecasts at its meeting next week. Even before the virus spread, our forecasts showed that inflation was already falling short of the ECB’s “below, but close to, 2%” target. That task has become even more difficult, supporting the case for a policy response.”

Separately, Eurostat said prices at factory gates, which point to trends in consumer prices later, rose 0.4% month-on-month in January for a decline of 0.5% year-on-year, also as expected by economists polled by Reuters.

Eurostat said the euro zone unemployment rate was 7.4% in January, again as expected and holding unchanged from December at the lowest rate recorded since May 2008. The corresponding figure for January 2019 was 7.8%.

Reporting by Jan Strupczewski; editing by Philip Blenkinsop and John Stonestreet

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