News

Eurozone Sees Two Consecutive Months of Deflation

The eurozone's inflation rate has trended lower, despite the European Central Bank's major stimulus efforts.

Read this excerpt from an Oct. 2 Financial Times article:

The eurozone's pandemic-hit economy sank into its second consecutive month of deflation in September, intensifying pressure on the European Central Bank to consider injecting more monetary stimulus.

Headline consumer price inflation fell to a four-year low of minus 0.3 per cent in September, below the expectations of economists surveyed by Reuters and down from minus 0.2 per cent in August.

It is the first time the eurozone has had two consecutive months of deflation since 2016, despite the ECB subsequently launching successive bond-buying programmes totalling trillions of euros and cutting interest rates deep into negative territory.

EurozoneDeflation

Core inflation, which strips out more volatile prices of energy, food and tobacco, hit a record low of 0.2 per cent in September, down from 0.4 per cent in August and 1 per cent in the same month last year. Most categories of prices fell, including services and industrial goods.

A prolonged period of deflation is considered to be unhealthy for an economy because it can discourage consumers from spending and businesses from investing if they believe prices could be lower in future, while it also transfers wealth from debtors to creditors.

All of this brings to mind this chart and commentary from Elliott Wave International's monthly Global Market Perspective (Elliott wave labels available to subscribers):

BrokenECB

This chart shows that the Euro Stoxx 50 index peaked soon after the ECB was established and immediately dropped 60%. The partial recovery from 2003 to 2007 got wiped out during the 2008 financial crisis, and another partial retracement ended ahead of the coronavirus outbreak earlier this year. The ECB's money pump (bottom graph) ran at a breakneck pace the entire time. Total assets at the central bank rose six-fold from 1999, spiking above €6 trillion this year. Even over the recent past, the Fed, the Bank of England, the European Central Bank, and the People's Bank of China offered hundreds of billions of emergency funding from early February to mid-March, providing trillions in liquidity operations, and collectively cutting interest rates an unprecedent 39 times alongside dozens of other central banks. These collective actions, though, did not underpin stocks -- which collapsed 40% over that time. Whatever your personal view regarding the merits or demerits of centralized banking, the view that the ECB, the Bank of England, or even the seemingly all-powerful U.S. Fed can bolster stocks by printing money runs contrary to all available evidence.