Eurozone inflation narrowly down to 0.9 per cent

(BRUSSELS) - Inflation fell slightly in the 16-nation eurozone to 0.9 percent in February, the first drop since last summer, according to initial official estimates Tuesday.

The small drop from the 1.0 percent inflation rate recorded by the EU's Eurostat data agency comes amid high unemployment levels and a falling euro, and analysts weren't holding their breath for a swift rebound.

The dip in the inflation rate in February is the first since the eurozone's historic low of minus 0.7 percent in July 2009, as the effects of the global downturn were pulling hard.

The inflation rate remains significantly below the European Central Bank's (ECB) target of close to but below two percent.

"Price pressures remain muted," in the eurozone said Ben May of Capital Economics.

"Producers' pricing power remains pretty limited amid substantial excess capacity and intense competition, even though eurozone manufacturing activity has firmed appreciably overall in recent months," he added.

Therefore, according to BNP-Paribas economist Clemente De Lucia, "firms need to offer significant discounts to stimulate a still weak demand."

On top of that "the ongoing deterioration in labour market conditions will limit wage inflation," he added.

Unemployment in the countries using the euro stood at 9.9 percent in January, providing more evidence that Europe's recovery from the worst recession in decades is a largely jobless one.

Most analysts don't see any major inflationary pressures either this year or next.

"Underlying price pressures continue to be held down by large output gaps across the region following deep recession, only gradual recovery, muted capacity utilization, and wage moderation amid high and still rising unemployment," IHS Global Insight's Howard Archer summarised.

"Furthermore, eurozone consumer price inflation seems set to stay below the ECB's target rate of close to but just below 2.0 percent through 2010 and, very possibly, 2011 as well," he added.