European Prices Fell More Than Economists Forecast in September

By Emma Ross-Thomas

Sept. 30 (Bloomberg) -- European consumer prices fell more than economists forecast in September as rising unemployment curbed demand and oil prices dropped.

Prices in the 16-nation euro region declined 0.3 percent from a year earlier after falling 0.2 percent in August, the European Union statistics office in Luxembourg said today. The September drop was the fourth straight decrease and exceeded the 0.2 percent fall projected by economists, according to the median of 29 estimates in a Bloomberg News survey.

Crude-oil prices have declined 33 percent in the past year during the deepest global recession since the Great Depression, dragging down inflation rates around the world. Even as evidence mounts that the worst of the crisis is over with the euro area’s two largest economies returning to growth, European households expect prices to decline further, a report from the European Commission showed yesterday.

“Inflation is probably going to go back into positive territory by the end of the year, but there are signs that the core rate is starting to ease and that trend is only going to become stronger,” Jennifer McKeown, an economist at Capital Economics in London, said before the report. “There’s a much greater risk of a damaging period of deflation than there is of a renewed sharp pick-up in inflation,” she said.

The European Central Bank expects inflation to average 0.4 percent this year and 1.2 percent in 2010, up from 0.3 percent and 1 percent forecast in June. ECB President Jean-Claude Trichet said on Sept. 3 that inflation would turn positive again “within the coming months.”

Covered Bonds

The ECB, which aims to keep inflation just under 2 percent, has cut its benchmark rate to a record low of 1 percent and started buying covered bonds to stimulate lending.

As an increase in euro-area unemployment to a decade-high of 9.5 percent curbs consumer spending, European businesses are cutting prices. Carrefour SA, Europe’s largest retailer, said on Aug. 28 that it will invest 600 million euros ($877 million) in discounts to revive its sales performance.

Puma AG, Europe’s second-largest sporting-goods maker, on Aug. 7 reported a 16 percent drop in second-quarter profit because of increased discounting. Spanish supermarket chain Mercadona SA plans to reduce prices by an average 17 percent this year.

Yesterday’s report by the European Commission showed that an index of consumers’ price expectations over the next 12 months held near a record low. The gauge rose to minus 14 in September from minus 16 in August, which was the lowest since the data started in 1990. The same survey showed executive and consumer sentiment in the euro region increased to the highest in 12 months in September in the sixth straight monthly gain.

Biggest Economies

The euro-area economy may expand 0.2 percent in the current quarter and 0.1 percent in the three months through December, the commission said on Sept. 14. In the second quarter, the economy contracted just 0.1 percent as Germany and France, the region’s two biggest economies, returned to growth.

The inflation report released today is an estimate. The statistics office will publish a detailed breakdown of the consumer-price data, including core inflation, on Oct. 15.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net