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Feb. 29, 2016, 5:46 a.m. EST

Eurozone prices fall, piling pressure on ECB

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By Paul Hannon

Eurozone consumer prices were lower in February than a year earlier, a setback for the European Central Bank in its lengthening struggle to prevent the currency bloc's slide into chronic deflation.

The ECB's governing council is set to meet on March 9 and 10 to decide whether to boost its stimulus programs, amid signs that the eurozone's modest economic recovery may be faltering. ECB President Mario Draghi has said the central bank won't hesitate to act if it believes recent financial-market turmoil or lower oil prices will weigh further on inflation in the currency area.

The European Union's statistics agency Monday said consumer prices were down 0.2% from February 2015, having been up 0.3% on the year in January.

The decline was the first since September of last year, and a steeper drop than economists had expected.

Prices also fell between December 2014 and March 2015, prompting the ECB to announce a program of government bond purchases that it raised to EUR1.5 trillion euros ($1.64 trillion) from EUR1 trillion as recently as December 2015. The central bank has also lowered its deposit interest rate to minus 0.3%.

The ECB can look beyond a short period of low inflation because it aims to keep inflation just below 2% over the medium term. But inflation has now fallen below its target for almost three years.

Policy makers will have new economic forecasts in March that are expected to show inflation this year falling far below the 1.0% estimated in December, following another sharp drop in oil prices.

The possibility that cheaper oil is feeding through into wages and other prices, as people lower their expectations of future inflation, is a prime concern for the ECB. Such a development could spark a deflationary spiral of ever-lower prices that Mr. Draghi has said the central bank would definitely take action against.

At its January meeting, some ECB Council members said there could be early signs of such so-called second-round effects.

Eurostat said its measure of core inflation--which excludes prices for energy and food that are very volatile and largely beyond the ECB's influence--eased to 0.7% from 1% in January. That development has likely concerned policy makers, since it indicates the decline in energy prices is spreading to prices of other goods and services. Eurostat said services prices were up 1.0% on the year, having been 1.2% higher in January, while prices of manufactured goods rose by just 0.3%, less than half the January rate of 0.7%.

Analysts say the March meeting will be a test of the ECB's credibility after it disappointed investors in December with a smaller-than-expected expansion of its stimulus. Most expect the central bank to cut further its already negative deposit rate-charged to banks for storing funds at the central bank-and accelerate its bond purchases.

Some governing council members, notably Bundesbank President Jens Weidmann, have warned against overreacting to lower oil prices. Mr. Weidmann stressed last week that the economic outlook for the euro area was "not as bad as it is sometimes made out to be," and fears of ultralow inflation feeding back into wages and other prices were "far-fetched at the moment."

However, Mr. Weidmann also objected to the launch of the bond-purchase program and its subsequent expansion last year, and was overruled on both occasions.

Economic indicators, meanwhile, are starting to flash red. A closely watched survey of purchasing managers last week indicated that eurozone growth probably slowed to its lowest level in over a year in February. A separate survey published by the European Commission showed economic sentiment at an eight-month low.

Write to Paul Hannon at paul.hannon@wsj.com and Tom Fairless at tom.fairless@wsj.com

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