Research & Commentary

Deflation Finished in Europe? Not So Fast

The financial press and the European Central Bank president say deflation is no longer a threat in Europe. EWI’s European analyst offers another perspective. Also, see a thought-provoking chart related to the world’s 12th largest economy.

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[Editor’s note: The text version of this video is below.]

Has the threat of deflation disappeared in Europe?

You might reach that conclusion after reading these headlines:

  • Eurozone finally escapes deflation in January (Marketwatch, Feb. 22, 2017)
  • ECB says no longer sees deflation risk in euro zone (Reuters, March 9, 2017)

It’s true that Eurozone inflation hit a four-year high of 2% in February, but EWI’s May European Financial Forecast offers this perspective:

Large swaths of the Continent continue to experience the kind of widespread economic weakness that comes alongside a deflationary trend. Eastern Europe is the latest example, where Romania’s central bank left its interest rate at 1.75% — its longest rate pause in more than a quarter century — citing inflation that remains “significantly below the bank’s target range.” (Bloomberg, 4/5/17) Consumer prices are growing at just 0.2% year-over-year today after they spent most of 2015 and 2016 in deflation. Likewise in Poland, March’s “unexpected letup in inflation” (Bloomberg, 4/5/17) appears to have justified the Polish central bank’s decision to keep its interest rates unchanged. With year-over-year price growth declining in April, officials say they might delay monetary tightening until 2019. These are tiny economies, to be sure, but take a look at the CPI trend in Russia, the world’s 12th largest economy.

After reaching a 13-year high of nearly 17% in the first quarter of 2015, “Russian inflation is bearing down so fast on the central bank’s target that it’s likely to shoot past the 4% goal.” (Bloomberg, 4/12/17) According to X5 Retail Group, the country’s largest grocery store chain, deflation is already affecting a fifth of its offerings. And, strikingly, the Russian public seems to be coming to grips with the trend. According to Levada Center, an independent Moscow-based polling organization, consumers overwhelmingly expect inflation to slow down rather than accelerate. “That’s a result we haven’t had for 25 years,” says one department head. (Bloomberg, 4/12/17)

And this expectation of an inflation-slowdown among Russian consumers fits with what Robert Prechter described in his book, Conquer the Crash:

The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation.

In EWI’s view, it’s a mistake to assume that the deflationary trend in Europe and elsewhere has been defeated.

Big-picture analysis suggests just the opposite.

 

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