Page last updated at 10:50 GMT, Monday, 31 August 2009 11:50 UK

Price falls slowing in eurozone

Woman speaks on her phone next to currency exchange signs
There has been falling demand in the eurozone in recent months

The eurozone's annual rate of inflation was negative in August for the third consecutive month.

Prices in the 16-nation bloc fell 0.2% in the past year, Eurostat said, following the record 0.7% fall in July.

Inflation in the eurozone has been dragged down by lower energy and food prices and by falling demand from both companies and households.

The downward trend began in June with a 0.1% fall in prices, but a Japan-style deflationary spiral is not predicted.

Oil effect

Deflation is considered damaging to an economy because consumers tend to delay making major purchases until prices fall further. Without consumer spending to stimulate growth, economic output falls.

The European Central Bank's target rate for inflation is just below 2%.

The reduced rate of price falls in August is "clearly primarily due to oil prices falling at a significantly reduced rate year-on-year," said Howard Archer, chief European economist at IHS Global Insight.

"It seems highly probable that July marked the deepest deflation in the eurozone and consumer prices will turn positive year-on-year within the next couple of months," he added.

Inflation in the eurozone peaked at 4.1% in July last year, when oil reached a record high of $147 a barrel.

The price of oil has since fallen back to about $70 a barrel.

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