Here’s What the European Central Bank’s Preferred Inflation Gauge Shows

Is Europe leading the world into a deflationary depression?

Well, consider that the International Monetary Fund just lowered its estimate of eurozone growth to a mere 0.8%. More than that, Germany risks “slipping into a third recession since 2008” (CNN).

Also, ECB President Mario Draghi’s preferred inflation gauge shows a trend that’s a big worry for the Continent’s financial authorities.

Read this excerpt from Elliott Wave International’s November 2014 European Financial Forecast:

If Europe’s economic debate were a prizefight, then the deflationists — who have languished on the ropes for years — just landed some dizzying counterpunches. [Consider] the 5-year/5-year forward swap (5y5y), a financial agreement where one counterparty exchanges a fixed rate of interest for a floating rate. “This is the metric that we usually use for defining medium-term inflation,” said ECB President Mario Draghi during his August 22, 2014, speech to central bankers in Jackson Hole, Wyoming.

Draghi may use the swap to define inflation, but … the 5y5y swap points unequivocally to deflation. In fact, the swap started to nosedive more than a year ago, when the October 2013 European Financial Forecast first discussed the deflationary portents of a similar gauge, the 10-year breakeven rate. By mid-August 2014, the 5y5y had sunk below the central bank’s 2% target for the first time ever. And after September’s brief rally stalled at the 2% level, the swap hit an all-time low of 1.54% last month.

In other words, even the central bank’s preferred inflation metric shows nothing but flat or falling prices over the foreseeable future.

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