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Euro zone inflation seen negative again

Source: Reuters - Tue 27th Oct 2009

Euro zone inflation remained negative for the fifth month in a row in October on the back of falling energy and food prices, preliminary numbers are expected to show next week.

Another month of falling prices on a year ago will give scant reason for the European Central Bank to start reining in the loose monetary policy it designed to boost an economy that is just now emerging from the deepest recession on record.

A Reuters poll of 41 economists showed inflation in the 16-nation bloc at -0.1 percent in October, up from -0.3 percent last month, but far below ECB's preferred 2.0 percent ceiling.

Forecasts ranged from -0.3 to 0.1 percent.

"Headline inflation should resume its rise as energy price base effects outweigh further declines in food and core inflation" said BNP Paribas economists in a note.

Energy prices have slid since last year, with oil prices currently at about $80 per barrel compared to around $100 last year and almost all of inflation's resurgence will be due to the base effect of oil prices.

Food prices have also been falling but have likely bottomed.

"Food inflation will probably decline a bit further in year-on-year terms, but October is probably going to be the trough" said Marco Valli, economist at UniCredit.

Despite forecasting another month of negative inflation fears about persistent deflation, a sustained and widespread fall in prices, are low as economists inflation to pick up in coming months. 

It is seen averaging 0.4 percent in the current quarter and 1.0 percent in the first three months of 2010.

Data due to be released on Wednesday is expected to show inflation in Germany, the 16-nation bloc's biggest economy, flat in October while on Friday figures from Italy will are likely to show prices rose 0.3 percent this month.

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