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Spain reports 1st price drop in 4 years as eurozone braces for deflation

MADRID--Spain reported Friday its first fall in consumer prices in more than four years, feeding fears that the eurozone could fall into the grip of a deflationary spiral.

Consumer prices fell at annual rate of 0.2 percent in March after crawling 0.1-percent higher the previous month, the National Statistics Office said in a preliminary report.

If the initial data are confirmed, it would be the first annual decline in consumer prices since October 2009.

As shoppers and businesses keep a grip on their wallets in a period of austerity and high unemployment, inflation has dropped to levels sounding alarm bells in much of the eurozone.

The danger is that a broad, sustained decline in prices can lead people to postpone purchases in the hope that prices will tumble even further, resulting in a vicious circle from which escape is difficult.

European Central Bank president Mario Draghi vowed this week to do everything possible to ensure the eurozone avoids falling into that trap.

“If any downside risks to the scenario appear, we stand ready to take additional monetary policy measures that ensure our mandate is fulfilled,” Draghi told a conference in Paris on Tuesday.

“In other words, we will do what is needed to maintain price stability,” Draghi said.

Inflation in the 18 countries that share the euro is running at 0.8 percent, however, far below the ECB's target of around 2.0 percent.

Trying to counter that deflationary risk, the ECB has cut and held its key interest rate at an all-time low of 0.25 percent, hoping that low financing costs will stimulate spending.

The European bank is penciling in a pick-up in inflation to 1.0 percent in 2014, 1.3 percent in 2015 and 1.5 percent in 2016.

In Spain, the eurozone's fourth-largest economy, prices have been held in check by weak demand.

Household budgets have been squeezed by an unemployment rate topping 26 percent and austerity measures such as sales tax increases.

Partly as a result, Spain is emerging only gingerly from five years of stop-start recession, sparked by a 2008 property crash that destroyed millions of jobs and plunged the nation into debt.

Though the Spanish economy struggled out of its latest two-year economic downturn in the second half of 2013, activity remains modest with the expansion measured at 0.2 percent in the final quarter of 2013.

IMF chief Christine Lagarde warned this month that persistently low inflation posed a looming threat to economic recovery in the eurozone region.

The ECB could do more to ward off the menace, she told an economic conference in Bilbao, northern Spain.

“There is still room to maneuver that can be used with a view to bringing the inflation to target and with the view to procuring the creation of jobs,” she said.

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