Deflation Once Again

The media faithfully reported Eurostat’s flash estimate of yoy inflation in the Eurozone at 0.3% for August on Friday last. The yoy rate says merely that prices were 0.3% higher in August than they had been twelve months previously. Just two pieces of information are employed – today’s number and the number twelve months earlier. The intervening eleven pieces of info are ignored.

What do these eleven observations have to say? Well it is not pretty. The index was unchanged over eight months, and actually fell over four months. The country-by-country numbers are only available for July. Here is what happened over the four months from March.

HICP July % Change over March

Belgium         -1.5                  Germany       +0.2

Greece           -0.8                  Estonia          +0.5

Spain             -1.0                  Ireland           +0.1

Italy               -1.6                 Cyprus           +2.2

Luxembourg    -0.5                  Latvia            +0.8

Austria           -0.5                  Netherlands   +0.1

Portugal         -0.1                  Slovenia        +0.2

Finland          -0.3                  Malta             +4.1

France            -0.4                  Slovakia        +0.2

Half of the 18 countries experienced price falls, half saw increases. The weighted average Eurozone inflation rate over these four most recent months was -0.5%. No large country saw a significant increase but two, Spain and Italy, saw prices fall 1% and 1.6%, hence the weighted average decline.

Using twelve-month rates is well-established but it is hardly best practice. Since the Spring it is clear that the Eurozone has been experiencing a widespread and in some cases rapid fall in prices. With nominal interest rates as low as they can go, and zero real growth, the feared deflation has already commenced. It could even be too late to do too little.




39 replies on “Deflation Once Again”

The deflationary trend is also evident in non-euro countries Switzerland, Sweden and Denmark, also reflecting exchange rates and declining energy and food prices.

EU harmonized consumer prices in Denmark were down 0.3% in July from June, while the index rose 0.4% from last year.

The 12-month average rate was also 0.4% in Denmark; 0.1% in Switzerland and 0.3% in Sweden.

German unions have negotiated an average pay rise of 3% in recent months but national pay rises have been rare since the recession.

Jens Weidmann, the Bundesbank president, who in 2012 had invoked Goethe’s tragedy, where Mephistopheles persuades the heavily indebted Holy Roman Emperor to print paper money – notionally backed by gold that had not yet been mined – to solve an economic crisis, with initially happy results until more and more money is printed and rampant inflation ensues, became strikingly unconventional in July 2014 by endorsing general pay rises.

Average real pay has fallen since 2008 for many workers in the UK.

The only real pay rises in the US since 2007 have been from the 80th percentile up but these rates average 0.1 to 0.2% annually.

The price index for personal consumption expenditures – the Fed’s preferred inflation measure – rose 1.6% in July from a year earlier, the Commerce Department said Friday. Excluding volatile food and energy prices, so-called core prices gained 1.5% year over year.

German hourly manufacturing wages are the highest in the industrialised world and in US dollar terms (excluding social security costs) in 2012 were at $36 compared with $26 in UK, $27 in US and $28 in France.

I don’t think the ECB is going to react to the current level of low inflation, beyond progressing already announced intentions. Draghi has let it be known that they are aware that core is a smidge soggy, but there will be strong determination to continue with the assumption that the fact – and it is a fact – that volatile energy and unprocessed food prices account for most of the reduction, makes it likely that the recent trend will reverse course.

I also think that the deflation panics of 1998 and 2008 have started to be replaced by some skepticism that mild disinflation or even slight deflation in the broad indices would necessarily be a slam-dunk economic disaster.

As if the ECB can reverse the malaise by adjust the cost of money by a few basis points. 25% unemployment in Italy but we got Euribor down by another 10bps LOL!

Pretty obvious it’s either time for ECB to *directly* fund stimulus spending through EIB or for the countries being crushed by German ideology to leave this Deutschmark.

Italy has now 12.5% unemployment, before 2000 they were always above 10%

Spain was above 20% before 1996

Falling energy prices are an unmitigated good.

Moderately falling food prices are also good, especially if this is driven by margin squeezing, when Lidl comes to town.

There is a reason why the Fed is targeting PCE ex food and energy.

Switzerland has practically zero inflation since a long time, and I see daily the picture of the hungry children and the homeless walking the streets there.

And if the deflation scare is not good enough to break the treaties and print money,

well, they are already working on the big bad German infrastructure investment gap scare.

How about a Panzer gap ?

Yes Francis, I did mean Spain not Italy, my mistake.
Of course, in Italy’s case perhaps you can explain away their youth unemployment?

Also, your citation of Switzerland’s economic performance is absurd – with the initiation of the Euro/Franc currency floor, Switzerland effectively began exporting unemployment to the Eurozone. It’s not hard to look like the smart kid when you cheat.

Shogun era …

All hail to the neo-kon kamikazis of the Neo(Ordo)Liberal Oligarchs …

Load with odious debt; crush with austerity; supine proxy-politicos; massage the medja; and the EU social project is no more.

[h/t The Last Good Samurai Post]

Sarkozy in June 2011

Pledging to exercise control over France’s own debt, he said: “I wasn’t elected so that France would experience the agony of Greece, Ireland and Portugal.”

All the time wasted in the meantime

The pity of it all.

I wonder what Smets and Wouters have to say now.

Is now the time to issue 100 year bonds to the ECB at 1% to refinance bank bail out costs, take trackers off the books & build roads and bridges. We could also re equip the armed forces of NATO to defend the Ukraine? I would say Francis has a few old maps that might be useful. I am sure the EU can find a way to call black white.

Seasonal patterns in consumer price series are easy to detect and quite regular. I have never understood why statistical agencies in Europe do not produce and publish seasonally-adjusted inflation indices.

Looking at seasonally adjusted month-on-month or quarter-on-quarter dynamics is much more informative particularly around turning points than year-on-year comparisons.

@ be a debaser

denmark runs a very close euro peg, most european countries align significantly, nobody complains, because this is the right thing.

When you take a look at the development of the swiss franc, that was just exploding in 2011 (from 1.67 Euro down to 1.12, within a year, and fair value at 1.4, for a country with 50% trade, mostly with Euroland), when the whole Greece drama etc became clear.

The alternative would have been to destroy half their economy, or just join the Euro.

They put a limit at about 20% overvaluation. This is harldy “exporting unemployment”.

@ Examiner
The 3-month numbers above are just irrelevant short term noise, and not seasonal patterns.

@ Tull
I do have maps from hundreds of years ago.

Some show the German colonies, Deutsch-Südwest and also Deutsch-Ostafrika : – )

A particularly interesting one shows the “Bund der Sowjetrepubliken” including Kiev and reaching close to Warsaw. Maybre I should sent a copy to Putin : – )

You can try to rationalise it all you want – if you think the Swiss Franc is overvalued versus an Italian Euro you’re just an ideologue. The Euro is what ails us, the CHF and DKK only reinforce that truth.

now, “be a debaser”,

how about you tell us, where you derive your opinion from, what the fair value of the swiss franc is,either vs Euro or vs Dollar?

And when I look at the youth unemployment chart, I do notice, that Italy cared very little about rates of 30% before the Euro, and 25% during the Euro,

but of course the recent development is all the fault of the Euro and Germany, as always, and there is a cure for every ill, print money.


‘I wonder when the markets will react’

I think a brief glance at the 10 year sovereign rates in the core Eurozone states will probably indicate that deflation is possibly already priced in at this stage, or at the very minimum certainly on that trend line.

As I indicated on a previous post the equity markets are singing a very different tune. Unlike the upheavals of 2008 this deflation scare (now a reality) is not new news so I’m not that convinced equity markets will react that significantly to the downside when the YoY rate eventually turns negative, as it surely will.

Kevin O’Rourke wrote an article for the economist magazine last Jan 2014 suggesting that current polices if continued at that time would eventually lead us to where we are today. He was right. But he wrote that in Jan – for equity markets 9 months is a lifetime and yet nearly all developed markets have recorded significant growth so far in 2014. So something terribly odd is at play or investors have taken the view that guaranteed long term negative real returns are unacceptable versus the volatile white knuckle rid in the equity seat.


Can you explain that ? Greek yields are below 7%.
The debt to GDP ratio is around 170%. Bullish growth assumptions have it coming down to 120% by 2022. Deflation is going to strangle growth.
The ratio will deteriorate. At some point Greece won’t be able to repay the debt. Is the market assuming the ECB will ? I don’t understand why yields are tightening.

It seems to be building into a big mess

There is a tendency to explain all market moves, ex post, in rational terms although markets are prone to fads and ‘irrational exuberance’.If markets were really expecting deflation and secular stagnation in Europe, as implied by a risk free rate of less than 1% ( as per German 10yr yields) then one might expect peripheral risk premiums to rise, given the implication for debt levels that scenario would imply, rather than fall.

Would a form of quantitative easing based on ECB investment in infrastructure be a productive way to cure deflation? Additional investment in public education could be another way to productively spend extra printed cash.


Secular stagnation is clearly what markets are expecting and there’s nothing to suggest that they’re wrong. The reason peripheral risk premiums are dropping is simply because the Market believes the ECB stands behind the debt; I trade this stuff all day – there is NO belief on the Buy side that the Eurozone will *allow* a sovereign default.

Of course everybody is also making the mistake of allegorising QE in the Eurozone with QE in the States/UK/Japan — this is completely incorrect because the Eurozone has no common Treasury arm. Rather, any ECB QE of European sovereign debt is more equivalent to a Fed enacting QE on *muni* debt – which did not happen. Such QE should be slightly more effective than traditional QE, which is, of course, just an asset swap and “works” predominately through placebo.

@ Mrs John Murphy

“The reason peripheral risk premiums are dropping is simply because the Market believes the ECB stands behind the debt”

Is it not also simple supply/demand? Too much money sloshing around looking for a return and given limited supply the price increases ? Unless the ECB can get the growth thing going the EZ is looking at low interest rates for a very long time. And low interest rates bring their own risks, particularly regarding misallocation of assets and asset bubbles..

As someone who experienced the double digit inflation of the 70s, nobody will ever convince me that 0% inflation is bad.

Low economic activity is bad, and that may lead to low inflation. It may also lead to less traffic on the roads and so to less road deaths. These are the good effects of low economic activity and surely can never be seen as bad in their own right.


Since you got lost on the way home from Croke Park (assuming that you found Croke Park!) seeking an outlet from the North Side of the Liffey, we know that your geo-radar is somewhat Challenged.

The Ukraine is not in NATO; nor are we: a situation which is more or less set to continue.


“As someone who experienced the double digit inflation of the 70s, nobody will ever convince me that 0% inflation is bad.”

From the same range – as someone who experienced the Nazis in Warsaw in the 40s nobody will ever convince me that the Soviets are bad

It all depends on how low inflation works, surely. Cui bono ?

Surely deflation is particularly dangerous for a country where a lot of people are in debt? Inflation erodes the true value of a debt, so is the opposite true of deflation? What does that mean for ireland, where so many families are in debt?

@ MF

The important issue is what is referred to as the “real” interest rate. In the 70’s inflation was double digit but then so too were mortgage rates.

@ BWS – this is worth a read

“A cautious and realistic assessment. It’s worth reading Debt Rattle Jun 4 2014: The Federal Reserve versus Hyman Minsky to appreciate just how policies of low interest rates and QE increase risk by creating debt based asset and equity bubbles, with these extracts explaining why:
Perhaps they (Central bankers) should have paid a little more attention to Hyman Minsky. Who long ago wrote – paraphrased – that if and when markets are perceived as being stable, it’s that very perception will make them unstable, because stability, i.e. low volatility, will drive investors into riskier asset purchases. (My insert)
The essence of what Minsky said is deceptively simple, and perhaps that’s why it’s so poorly understood: it’s not possible to “create” a stable market, because the very moment you try, you create its opposite, instability. Minsky’s financial instability hypothesis is quite clear, and frankly, if you don’t believe him you should first prove him wrong before trying to do what he says can’t be done anyway. If you feel you need to provide forward guidance because markets are weak and you think they’ll strengthen if you say you’ll keep rates at a certain level, you need to realize that the stability you’ve trying to convey will of necessity be self destructive.
Markets need uncertainty to be able to function properly. That’s what Minsky said. And trying to take away that uncertainty with forward guidance and trillions of dollars (or pounds, euros etc) is a move that cannot end well. Markets are populated with people, and if you take uncertainty out of people’s individual lives, there’s no telling what they’ll do either, other than it’s certain they’ll increase the risks they take. (My insert)

This is why I’m not betting my house on recovery in the UK, or the US, Eurozone, Japan and especially in China, which has created a huge credit (or debt) based construction bubble that has been further leveraged via their highly opaque shadow banking system, with much of the commodity based collateral used to the obtain the credit being fictitious.
The reality is that the entire global financial system is brimming with risks, and of special concern are those risks hidden on the balance sheets of the too big to fail banks, including those of many central banks.”

@ seafood

All this asset bubble talk goes over my head; we may or may not be heading for the mother of all busts. Somehow though, having survived lending zillions in sub-prime junk and the resultant almighty credit crunch, I feel that the powers that be will always find a way to do “what it takes”.

Meanwhile I am merely commenting that who is really complaining if prices aren’t rising. Even mortgagees never had it so good with these artificially depressed interest rates.

These numbers are not seasonally adjusted. According to Eurostat the HICP index for clothing and shoes went down by -14% from March to July (summer sale) which (thanks to an HICP weight of about 6.6%) drags the overall HICP down by close to 1pp.

There is also seasonality in other categories and not the whole drop of the index for clothing may be due to seasonality, but it still indicates that neglecting seasonality may lead to misleading results.


Martin Wolf is back onto Minsky today

“On all this they were proved wrong, as the late and disregarded Hyman Minsky had sought to warn them. Among his many insights into how financial systems actually work, as opposed to how too many economists believed they did, was his realisation that stability ultimately destabilises.
The longer a period of stability endures, the more risks people will see as potentially rewarding”

Making financial sense of the future

@ seafood

Happiness ultimately leads to unhappiness. People say, I am fed up with all this happiness. So what? Does Minsky predict the end of the world as we know it?

@ BW2

I think Minsky was more interested in how the system worked. It’s still mostly a boom and crash contraption.

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