Eurozone PPI in record fall

Prices at eurozone factory gates logged their biggest annual fall on record in March, data showed on Tuesday, pointing to possible deflation in coming months and boosting ECB rate cut expectations. Producer prices in the 16-country euro currency area fell 0.7 percent month-on-month and 3.1 percent annually, the biggest drop since EU measurements started in 1996, the European Union statistics office, Eurostat, said.
"The massive contraction in industrial activity across the eurozone in recent months has clearly hit manufacturers' pricing power very hard," said Howard Archer, chief European economist at IHS Global Insight.
Economists polled by Reuters had expected the prices to decrease 0.5 percent from a month earlier for an annual fall of 2.9 percent year-on-year. Producer prices show inflationary pressures early in the pipeline as their moves are usually reflected later in consumer prices, which the European Central Bank (ECB) wants to grow by just under 2 percent year-on-year.
Falling prices are a response to flagging demand as the eurozone economy sinks into its worst recession since World War Two on the back of the global financial crisis. The ECB has cut its main refinancing rate by 300 basis points since October to boost economic growth as inflation has fallen to record lows.
The data reinforced expectations that the ECB to cut its main rate by a further 25 basis points to 1 percent at its meeting on May 7, especially that consumer inflation stayed at 0.6 percent year-on-year for the second month running in April. "We still expect a final 25bp cut in the refi rate this week, coupled with an extension of the existing support to the banking sector," said Collin Ellis, analyst at Daiwa Securities SMBC Europe.
Eurostat said the main driver behind the annual fall in producer prices was a 7.3 percent drop in energy costs, thanks to cheaper oil and gas. Intermediate, or semi-finished, goods prices were down 4.1 percent and those of non-durable consumer goods fell 1.6 percent.
However, prices of durable consumer goods were up 1.8 percent year-on-year and capital goods, or some commodities and raw materials, grew by 1.5 percent. Eurostat revised its February producer price data to -0.4 percent month-on-month and -1.7 percent yearly from previous readings of -0.5 percent and -1.8 percent respectively.