Euro zone escapes deflation in June, as prices rise more than expected

By Francesco Guarascio

BRUSSELS (Reuters) – Consumer prices rose in the euro zone during June for the first time in five months, suggesting the European Central Bank’s efforts to fight deflation were beginning to have some effect.

Annualized inflation picked up to 0.1 percent in June from -0.1 percent in May, the European Union’s statistics agency Eurostat said in a flash estimate released on Thursday. Economists polled by Reuters had expected no increase in June.

Prices had not risen in the 19 countries using the euro since January, when inflation reached 0.3 percent. Deflation set in for three of the next four months. Prices were unchanged in March.

June’s inflation rate remains far from the ECB’s target of just below 2 percent. But any sign that inflation is reviving is good news for the central bank.

The ECB has been buying 80 billion euros worth of assets a month to pump money into the economy and prevent a deflationary spiral. Interest rates have been cut below zero and free loans offered to banks.

It has also promised to take any action needed to preserve financial stability after Britain voted on June 23 to leave the European Union. The return to inflation and a recovery in financial markets after the British vote may allow the ECB to put off that action for now.

In any case, the ECB expects Britain’s departure the EU will have limited effect on euro zone growth in the next three years.

Core inflation, which excludes the most volatile components of unprocessed food and energy, was unchanged at 0.8 percent in June. The narrower inflation indicator, which excludes energy, food, alcohol and tobacco products, rose to 0.9 percent from 0.8 percent in May, another encouraging sign for the ECB.

Energy prices fell in June, but the decline slowed to 6.5 percent from the 8.1 drop recorded in May.

Prices for services, the biggest component of the euro zone economy, rose 1.1 percent year-on-year, the strongest increase among the main components of the inflation index. They rose 1.0 percent in May.

The better-than-expected inflation estimates came after Eurostat signaled on Wednesday that consumer expectations of price trends over the next 12 months rose for a third straight month in June.

Companies’ expectations of developments in producer prices also rose in June for a fourth consecutive month, providing the first positive reading since October 2014 and the highest level since January 2014.

(Reporting by Francesco Guarascio,; editing by Larry King)