Euro Zone Inflation To Resume Its Decline After Bounce

The rapid fall in the euro zone's annual rate of inflation came to an end in February, although that's likely to mark a pause rather than a reversal in the trend.

European Union's official statistics agency Eurostat Monday said the annual rate of inflation in the euro zone rose to 1.2% from 1.1% in January, ending a sequence of six straight months of decline.

The inflation rate last rose in June 2008, before steadying at 4.0% in July and beginning its long, energy-led slide in August.

The rise in the inflation rate was a surprise, with economists surveyed by Dow Jones Newswires last week having forecast the rate would be unchanged.

However, with the economy slowing, economists don't expect the inflation rate to continue to rise in the coming months.

A survey of purchasing managers in the manufacturing sector also released Monday suggested inflation will resume slowing in March. The headline Purchasing Managers Index for the sector fell to 33.5 in February from 34.4 in January, the lowest reading in the survey's 12-year history.

But the survey also showed that manufacturers cut their prices for the fourth month running, and at the fastest pace in the survey's history.

"We expect euro-zone headline inflation to resume declining ... in March, when consumer prices should fall below 1%," said Marco Valli, an economist at UniCredit.

The annual rate of inflation remained well below the level of just under 2% that the European Central Bank defines as consistent with its goal of ensuring that prices remain stable over the medium term.

The slight pickup in the inflation rate is therefore unlikely to prevent the ECB's governing council from delivering a flagged cut in its key interest rate to 1.5% from 2.0% when it meets Thursday.

The dire situation facing the euro-zone economy was underlined by figures from Italy, which showed that gross domestic product shrank by 1% in 2008, the sharpest contraction in 33 years.

In its preliminary estimate, Eurostat doesn't give details of how prices for the various goods and services that make up its inflation basket changed over the month.

But economists estimate that while energy prices eased slightly, prices of some other goods and services rose on the month.

Prices of some goods - such as clothing and household equipment - are traditionally lowered in January during post-Christmas sales, and then raised back to more normal levels. In January, prices fell by 0.8%, the largest decline in a single month since records began in 1997.

Indeed, economists still expect the euro zone to experience a period of deflation - when prices in general are lower than they were a year earlier - this summer.

"We still expect inflation in the region to turn negative later this year, underlining the need for further policy stimulus beyond this week's interest rate cut," said Ben May, an economist at Capital Economics.