Euro-Area Factories Cut Prices as Deflation Risks Loom Large

Factories in the euro area slashed prices of goods by the most in a year in January, highlighting the deflationary risks that’s keeping alarm bells ringing at the European Central Bank.

In its monthly manufacturing report, Markit Economics said price pressures “remained on the downside” and output charges fell for a fifth month. In addition, all countries in its survey reported declines, the first time that’s happened in 11 months.

President Mario Draghi said the European Central Bank’s stimulus policies will be reviewed in March as the region’s inflation rate may drop below zero again because of oil’s slump. Price growth has been slower than the central bank’s goal of just under 2 percent for almost three years.

“The euro zone’s manufacturing economy missed a beat at the start of the year,” said Chris Williamson, chief economist at Markit. “If the slowdown in business activity wasn’t enough to worry policy makers, prices charged by producers fell at the fastest rate for a year to spur further concern about deflation becoming ingrained.”

Inflation in the 19-country region accelerated to 0.4 percent in January, according to data last week, with the core rate rising to 1 percent. Still, that may only be a temporary reprieve.

Markit’s headline Purchasing Managers’ Index fell to 52.3 from 53.2, matching an initial estimate published last month. Among the region’s largest countries, growth slowed in Germany and Italy, stagnated in France and accelerated in Spain.
Markit said its survey signals annual manufacturing output growth of just 1.5 percent at the start of the year.

“The data are likely to add to pressure on the ECB to expand the central bank’s stimulus programme as soon as March,” Williamson said.

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