Deflation, Coming to a Continent near you
Deflation has finally arrived in Europe. It is now undeniably hear. While Mario Draghi continues to claim that inflation expectations are well anchored, the reality is that the ECB has waited too long to act, and now has a mountain to climb. They have repeated the policy mistakes of the Fed in the 1930s or Japan in the 1990’s, and refused to believe that monetary policy was the correct tool to manage aggregate demand. I am, in all honesty, surprised by the length of time it has taken. Ever since the ECB raised rates in 2011, choking off a nascent recovery this has been the predictable outcome. I thought 12% unemployment in the Eurozone would drive deflation in 2012. I suspect this is a feature of how we measure inflation. I have a whole series of posts coming up on how to measure inflation better, based on my original foray into this space, and some musings of the Atlanta Fed’s statistician, plus some Machine Learning insights.
Anyway, I just wanted to chronicle the arrival of deflation today:
The CPI recorded an annual rate of change of -0.9% in July 2014. Excluding energy and unprocessed food, the annual rate was -0.4%. The CPI monthly rate decreased to -0.7% (0.1% in June 2014 and -0.2% in July 2013), while the CPI 12-month average rate was -0.2% in July.
The EU-harmonised index (HICP): JULY JUNE MAY Monthly change -2.1 0.1 -0.1 Yr/yr inflation 0.0 0.2 0.4 Index (base 2005=100) 117.9 120.4 120.3 The NIC index: Monthly change -0.1 0.1 -0.1 Yr-on-yr inflation 0.1 0.3 0.5 Index (base 2010=100) 107.5 107.6 107.5
Of course, Greece:
But don’t worry, this is all a needed competitive adjustment, which we can see directly from the robust inflation rates in the other, stronger UK economies:
Or perhaps from the robust inflation in the Eurozone as a whole?
Deflation is here. The ECB is out of excuses, and out of time. If it cannot deploy QE because of political impediments, then this depression is about to get worse. A lot worse. Ill leave you with some comments from a market economist, via Joe Weithensal:
For Euroland, the big picture is that the economy is in its seventh year of depression. On our estimate of a 0.7% contraction in the second quarter, GDP was still 3.2% lower than it was in the first quarter of 2008, when the depression began. Euroland’s economy actually contracted in the first quarter of this year when you exclude Germany’s unexpected surge to a 3.3% annualized rate of growth. Only people who were misled by Markit’s untested and unproven PMIs believed that such growth was real and sustainable. Our estimate of second quarter GDP for the Euro Zone includes a contraction of Germany’s economy at a 2% annualized rate, reversing the windfall in the unexplained and inexplicable first quarter spurt. If our forecast proves correct, average GDP growth for Germany in the first half of 2014 will work out to 0.7% at an annualized rate, clearly less than potential but very much in line with the experience over the last few years. Our estimate for France’s economy is a more horrible contraction of 1.1% for the quarter, or 4.3% at an annualized rate.