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European producer prices fell more than economists forecast in February and retail sales dropped by a record, highlighting the increasing risk of deflation in the region.

Factory-gate prices in the euro region fell 1.8 percent from the year-earlier month, the most since April 1999, the European Union’s statistics office in Luxembourg said today. Economists had forecast a 1.5 percent decline, according to the median of 21 estimates in a Bloomberg News survey. Retail sales dropped 4 percent from a year earlier, a separate report showed.

The deepening of the global slump and a 60 percent drop in oil prices from a July record have eased inflation pressures across the euro area. The region may record a temporary decline in annual consumer prices this year, European Central Bank President Jean-Claude Trichet said on April 2 after cutting the benchmark interest rate by a quarter-point to 1.25 percent, less than the half-point reduction economists expected.

“With unemployment mounting, it is clear that euro-area consumers are keeping their hands in their pockets” which “raises the risk of deflation,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London. “The ECB could have a fight on its hands to get consumer-price inflation back near” its 2 percent target in 2010.

Weak Spending

The euro pared some of its gains after the reports and was up 0.1 percent at $1.3501 at 11:07 a.m. in London.

From the previous month, producer prices fell 0.5 percent in February. The monthly decline in January was revised to 1.1 percent from 0 affordable health insurance.8 percent.

The annual drop in retail sales exceeded economists’ forecasts for a 2.5 percent decline and was biggest since the data series began in January 1996. From the previous month, sales declined 0.6 percent.

“Spending is not benefiting from sharp falls in inflation,’ said Jennifer McKeown, an economist at Capital Economics Ltd. in London. “Given the rapid deterioration in labour market conditions, consumer spending will probably remain very weak.”

Consumer-price inflation in the euro area slowed to a record low 0.6 percent last month, according to an estimate published on March 31. In Spain, consumer prices declined from a year earlier for the first time ever. While Trichet sees a “temporary” decline in euro area consumer prices during this year, this is a “disinflationary episode” and he doesn’t see a “materialization of deflationary risk,” he said.

Unemployment in the euro area rose to 8.5 percent in February, the highest since May 2006. The economy may shrink as much as 4.1 percent this year, according to the Organization for Economic Cooperation and Development.

Energy prices at the producer level fell 4.5 percent in February from a year earlier, according to today’s report. From the previous month, energy prices declined 0.7 percent. The core rate of inflation, which excludes energy and construction, fell to 0.1 percent in February from 0.9 percent the previous month.

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