BRUSSELS (AFP) – Deflation in the 16 euro countries deepened in July as consumer prices fell a record 0.6 percent, after dropping for the first time last month, according to an official EU estimate Friday.

“Euro area annual inflation is expected to be (minus) 0.6 percent in July 2009 according to a flash estimate,” the European Union's Eurostat data agency said in a statement.
The figure was minus 0.1 percent in June.
After hitting a record high of 4.0 percent in June and July 2008, eurozone inflation has fallen sharply as oil and other commodity prices have collapsed in the face of the global economic downturn.
It now stands at the lowest level since the euro bloc was formed in 1999 and even before statistics for the area began to be compiled by Eurostat in 1996.
“The eurozone is likely to see deflation for the next few months before consumer prices start rising modestly year-on-year late in 2009,” warned economist Howard Archer at consultants IHS Global Insight.
The drop was due to lower energy prices and an easing in food prices. Core inflationary pressures were also diluted by weak demand, increasing spare capacity, rising unemployment and wage moderation, he said.
Most economists have expected that eurozone inflation would dip briefly into negative territory but they have ruled out a longer Japanese-like bout of deflation, a pernicious downward spiral in prices.
While the prospect of falling prices may delight consumers it can wreak havoc on the broader economy as households put off purchases hoping for future bargains, undermining demand and in turn investment in new production.
That then puts pressure on employment, causing further falls in demand and so setting up a dangerous vicious circle which can potentially cripple an economy.
The European Central Bank (ECB) expects deflation to run for just a short period.
The International Monetary Fund, in a report Thursday, refused to rule out a small risk of deflation if the recession drags on and unemployment deepens for longer than anticipated.
In an estimate for the month of June, Eurostat said Friday that unemployment had risen as companies continued to shed jobs to weather Europe's worst post-war recession.
The seasonally adjusted unemployment rate stood at 9.4 percent, up from 9.3 percent in May. The figure stood at 7.5 percent 12 months ago.
It meant that the number of people out of work rose by 158,000 over the month, to bring the total number of job seekers in the single currency bloc to 14.9 million.
The unemployment rate in the full 27-nation EU stood at 8.9 percent in June, also up by 0.1 percentage point over May. This compares to a rate of 6.9 percent in June 2008.
Archer said the outcome was not as bad as feared but that “it will be some time before any improvement in economic activity feeds through to substantially help the jobs outlook.” -