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Worries over deflation surface

INFLATION in Europe stayed close to a 10-year low and payrolls contracted by the most on record as the worst global recession since World War II deepened.

Consumer prices in the euro area rose 1.2 percent from a year earlier in February, compared with 1.1 percent in January, which was the lowest rate in a decade, the European Union statistics office in Luxembourg said yesterday.

European payrolls shrank 0.3 percent in the fourth quarter from the previous three months, the second quarterly contraction and the biggest decline since the data series started in 1995, a separate report showed.

Oil prices are down by two-thirds since a July peak and Europe's jobless rate is at a two-year high, prompting deflation concerns and putting pressure on the European Central Bank to announce new measures to stimulate lending.

Retail sales have fallen for eight months and Carrefour SA, Europe's largest retailer, said on Thursday that it would step up price cuts.

"Most analysts, including us, are thinking the ECB is underestimating the risk of deflation," said Martin van Vliet, senior economist at ING Bank in Amsterdam. "There's a risk that lower headline inflation, lower core inflation will start to impact on expectations of households and markets and that's what the ECB is sort of in denial about."

ECB President Jean-Claude Trichet said last week that deflationary risks were "negligible," even as he left the door open to another interest-rate cut.

The central bank, which expects inflation to average just 0.4 percent this year, has already reduced its key rate by more than half since early October to a record low of 1.5 percent, Bloomberg News said.

Goldman Sachs Group Inc expects the euro-area economy to shrink by 3.6 percent this year and lowered its forecast for the global economy on Friday to a 1-percent contraction.

The World Bank has also said that the world economy may contract this year for the first time since World War II.

Finance chiefs from the Group of 20 meeting in Britain over the weekend pledged a "sustained effort" to end the worldwide slump.


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