Eurozone producer prices fall into negative territory for the first time sinc...

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A key measure of euro zone inflation has fallen into negative territory for the first time in two and a half years, in a further sign that the price surge that has hit businesses and households is now in retreat. The EU statistics office Eurostat said factory-gate prices in the region fell 1.5 percent in the year to May, the first absolute drop since December 2020. The measure has fallen significantly since the summer, when annual price increases peaked at 43.3 percent in August after energy costs rose in the wake of Russia's large-scale invasion of Ukraine. The drop will raise hopes that a series of rate hikes by the European Central Bank will finally begin to bear fruit. Central bank figures on Wednesday showed that households increasingly expect inflation to fall sharply over the next year, a trend that Nomura economist Andrzej Szczepaniak described as “exactly what the ECB will have been looking for.” However, consumer price inflation remains well above the ECB's 2 percent target at percent in the year to June.

Percent, core consumer prices are near record highs. Higher borrowing costs also weigh on activity in the region's real estate market. Separate data released by Eurostat on Wednesday showed house prices Job Function Email Database fell for the second quarter in a row, although by a smaller amount in the three months to March than in the final quarter of 2022. Average mortgage rates in the eurozone now stand at 3.58 percent, up from 1.78 percent a year ago, according to ECB figures. The central bank raised its benchmark deposit rate by 4 percentage points to 3.5 percent over the past year. A breakdown of producer prices showed energy costs fell 13.3 percent compared to May last year. Factory-gate prices charged for intermediate goods, such as machinery parts, also contracted. Producer prices fell 1.9 percent between April and May, with all EU countries except Malta reporting a contraction. Eurozone house prices fell 0.9 percent in the first quarter compared to the previous three months, following a 1.7 percent contraction in the previous quarter.



That marked the first two consecutive contractions in nearly a decade. House Price Index Line Chart Showing Eurozone House Prices Have Cooled Household inflation expectations for the next 12 months fell to 3.9% in May, from 4.1% in April, according to the ECB's quarterly survey. The drop in inflation expectations to the lowest level since last March “illustrates very well that the disinflationary process in the eurozone is gaining momentum,” said Carsten Brzeski, an economist at Dutch bank ING. He added that it confirmed his view that "both headline and core inflation could fall faster towards the end of the year than the ECB currently thinks." Markets expect rate setters to raise borrowing costs by a quarter point at the next two policy meetings in July and September. In Germany, the region's largest economy, prices have fallen 6.8 percent. Sven Jari Stehn, an economist at Goldman Sachs, said: “The drag from policy tightening through the housing market is likely to increase.