The inflation rate across the 16-nation euro zone fell to zero in May, figures showed Friday, its lowest in 13 years of records, underlining the increasing risk of deflation — a damaging decline in wages and prices that could damp recovery prospects world-wide.

Prices are falling in six of the countries that share the euro. Spain logged a third consecutive month of negative inflation in May, with prices down an estimated 0.8% from the year before. German prices slipped 0.1% this month from May 2008.

The euro-zone estimate of 0% annual inflation for May surprised economists, whose consensus was for a 0.2% rise. Even that would have been the euro zone’s lowest rate since comparable records began in 1996. Economists at Royal Bank of Scotland estimate inflation hasn’t been as low since 1953.

Euro-zone consumers increasingly expect lower prices over the next year. Inflation expectations in May fell to their lowest level since records began in 1990, according to a European Commission survey Thursday. If consumers expect prices to fall, they may hold back on purchases, pushing prices down further.

In Spain, unemployment reached 17.4% in March and prices have been falling since. Some economists dismiss the deflation threat. But a rising number of retailers are giving consumers the option to trade down to discount brands

The team at Variant Perception just gave their opinion about Spanish crisis:

“As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a real estate collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans will go bad.

Spanish banks are now facing a very bleak outlook. Spain’s unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.

Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We’ve often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled ‘Spanish banks control half of all real estate appraisals.’ You can’t make this stuff up. We haven’t even begun to see the worst in Spain yet.”

From green shoots to yellow weeds to …