Teunis Brosens, Research Analyst at ING, suggests that we’re back in deflation territory as the Eurozone headline inflation unexpectedly fell back to -0.2%YoY in February. Key Quotes “While a negative contribution of energy prices was expected, the real and very unwelcome surprise is that core inflation is down to 0.7%YoY, the weakest reading since April last year. While details are not available in Eurostat’s flash estimate, the weakening of core inflation appears to be broad-based. Non-energy industrial goods inflation weakened to 0.3%YoY, the lowest reading since September, while services inflation fell to 1.0%, the lowest since April. Moreover, the weakening of core inflation is in line with e.g. continuing weakness of producer prices and PMI survey responses on prices. The attitude towards inflation in the Eurozone remains paradoxical. At face value, the fact that headline inflation averaged 0.0% over the past 15 months is great news for consumers. In fact, the boost low inflation has given to purchasing power has helped consumption becoming the main driver of growth in the Eurozone. But today’s deflation surprise will focus minds again on the negatives of low inflation. The weakening of core inflation shows the real and present danger that cheap oil will cause low inflation to become ingrained in Eurozone price and wage dynamics. This is especially bad for debt-laden households, businesses and governments in Southern Europe, which will have little scope to “inflate away” their debt burden by increasing nominal wages. Today’s weak core inflation gives doves the upper hand at next week’s ECB-meeting and therefore pretty much seals the deal on additional monetary easing.” For more information, read our latest forex news.