Prices in the eurozone stopped rising in May – with the annual inflation rate at 0.0% – igniting concern that prices will fall in the months ahead.

This is the lowest inflation rate recorded since 1997. Inflation stood at 0.6% in April, after hitting 4% when energy prices hit record highs.

Many analysts now expect deflation to grip the 16-nation zone this summer.

Separately, official figures showed an unexpected rise in retail sales in Germany in April.

The 0.5% increase from the previous month has raised hopes that consumer spending could help to support the German economy – Europe’s largest – after its record slump in output in the first quarter of this year.

“So far, consumers have been the positive surprise during the recession. Consumer confidence has been stable for several months. Now, it looks as if consumers are finally putting their money where their mouth is,” said Carsten Brzeski at ING.

‘Cold water’

There was less optimism among analysts for the wider eurozone.

“Today’s data poured some cold water on any nascent hopes of a recovery. A slip into deflation in the next couple of months looks odds-on,” said Colin Ellis at Daiwa Securities.

Others were even more forthright.

“There seems little doubt that the eurozone will see deflation in June and that it will persist over the next few months at least,” said Howard Archer at IHS Global Insight.

Deflation is considered damaging to an economy as consumers tend to delay making purchases until prices fall further. Without consumer spending to stimulate growth, economic output falls. (Via BBC)