Europe's Slide into Deflation Appears Unstoppable

Guess which country has the highest inflation rate in all of Europe?

The answer is not Germany. The Continent's economic stalwart has an inflation rate of less than 1%. Even France's inflation rate is higher than Germany's though still less than 1%.

Great Britain? No. But you're getting warmer. The inflation rate in the U.K. is higher than 1%, but the answer is Norway at 1.6%.

The point is that all of Europe's major economies have an inflation rate of less than the 2% target.

"Can Anything Halt European Deflation?" is the title of a July 9 Wall Street Journal article that reports, "Consumer prices are rising a mere 0.5% on the year across the region overall."

Here's another excerpt:

Is there anything Europe's central bankers can do to stop what looks like a relentless slide into deflation? ....

A number of economists figure that the ECB will need to fire a Bank of Japan-style blunderbuss to stave off deflation. The Bank of Japan has launched a massive asset purchase program as part of Prime Minister Shinzo Abe's effort to lift the country out of its two decades of on-again off-again deflation.

At first sight the Abe program seems to have worked. Inflation has jumped to levels not seen in decades. But much of this rise is down to an increase in consumption taxes and the impact of yen's weakness on import prices.

Ironically, the biggest impact of this jump in inflation seems to be in depressing real Japanese wages. In other words, the inflation is likely to act as a drag on domestic demand unless employers start raising salaries sharply.

Which is why some economists think the ultimate effect of Abenomics will be to create even deeper deflation down the line.

You can review the entire article, which includes a chart of the annual change in consumer prices of several European economies, by following the link below.