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Spanish Price Plunge Echoes Across Euro Area

(Bloomberg) — Consumer prices from Germany to Italy and Spain signaled an easing of deflation risks in the euro area as the European Central Bank prepares to unleash quantitative easing.

In Italy, inflation was 0.1 percent this month, better than the minus 0.3 percent rate forecast by economists in a Bloomberg News survey. Data from four German states before national data later on Friday also showed improvement, while Spanish prices fell less than estimated.

Plunging oil costs have damped inflation across the globe, including in the U.S. and the euro area, where consumer prices fell 0.6 percent in January. While the latest data, along with an increase in oil from its recent low, may indicate the worst of the inflation slump is passing, the euro-region economy remains weak and lumbered with high unemployment.

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“A bit better does not mean good,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “Unemployment will barely fall in many member states; output will not reach pre-crisis levels for another two to three years and much stronger inflation is not in sight.”

Prices in Germany fell 0.5 percent, according to the median forecast of economists in a Bloomberg survey. The data from the four states published earlier on Friday suggest the rate may be less negative.

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Spanish prices fell 1.2 percent from a year earlier after a 1.5 percent decline in January, which was the biggest since 1997. The Italian reading was the first above zero in three months.

Inflation Projections

The numbers will be closely watched ahead of euro-wide data due Monday that’s forecast to show prices in the 19-nation economy falling on an annual basis for a third month. Three days later, Draghi will unveil the ECB’s new inflation and growth projections, as well as provide more details on its large-scale asset-purchase program.

The ECB’s concern is the risk that consumers postpone spending in anticipation of declining prices. That’s what prompted the ECB to pledge in January to spend at least 1.1 trillion euros ($ 1.2 trillion) to avert a deflationary spiral.

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“In an environment of weak economic recovery and subdued money and credit developments, risks were increasing that falling inflation expectations would feed back into weakening actual inflation,” Draghi told European lawmakers on Wednesday. “A more forceful monetary-policy response became necessary.”

Price Expectations

Economists in Bloomberg’s monthly poll forecast euro-area consumer prices will fall 0.5 percent this quarter and 0.1 percent for the year. That compares with the ECB’s inflation goal of just below 2 percent.

“The ECB has put a floor on inflation expectations with QE,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “But the pressure will remain on the central bank as long as inflation doesn’t move closer to the target. And that won’t happen this year.”

When the ECB revises its forecasts, it will also take into account the stimulus from falling oil costs, which are boosting consumers’ purchasing power. Economic sentiment in the region rose to a seven-month high in February, according to a report on Thursday.

In Spain, where the inflation rate has been below zero for eight months, lower prices are helping shift the direction of the recovery from exports to domestic demand. The economy grew at its fastest pace since 2007 in the fourth quarter, as household consumption jumped 0.9 percent.

Meanwhile in Italy, consumer confidence rose to the highest in more than 12 years in February. That may help Prime Minister Matteo Renzi as he struggles to pass reforms to kick-start an economy that’s failed to grow for more than three years.

To contact the reporter on this story: Maria Tadeo in Madrid at [email protected]

To contact the editors responsible for this story: Fergal O’Brien at [email protected] Jana Randow

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