Euro area inflation in Feb likely decelerated below zero again as oil and food prices drop

Euro area has likely entered deflation again with CPI data for Germany showing that inflation in February fell below zero again, along with weak readings for Spanish and French inflation. Germany's headline harmonised (HICP) inflation rate dropped to a five-month low of 0.2% in February from +0.4%.

Meanwhile, HICP inflation in Spain decelerated to -0.9% from -0.4% and in France fell from +0.3% to -0.1%. The drag from energy was expected to have grown due to the oil price movements. Food inflation is also expected to have dropped, based on the comments from the Spanish statistics agency.

However, the drops are not just attributed to food and energy impacts. Manufactured goods and services inflation in Germany and France fell, implying that there is a renewed deceleration in core inflation in euro area in February. Overall, the data indicates that inflation in the euro area is likely to have decelerated to -0.1% in February, the first time below zero since September. The drag from energy is expected to fade in the future, assisting inflation to acceleration above zero. However, if oil prices continue to remain low, the euro area might be in deflation for a longer period of time.

The core inflation is expected to be weak. Indeed, the strong labor market in Germany might help boost wage growth there. However, Spain, Italy and France are not expected to experience the same. Moreover, underlying price pressures are not expected to build with the already slowing of the euro area economy.

Overall, the headline inflation rate for the euro zone is expected to drop below zero in February. Furthermore, the risk of a more persistent bout of deflation continues to be very real with inflation expectations low and dropping.