Research & Commentary

“No Turning Point in Sight” for Europe’s Deflation

The fear of a European deflation among the Continent’s financial authorities has almost melted away. Indeed, the majority of surveyed economists see an inflation jump just ahead. But, there’s another way to look at the data.



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

A European deflation? Three-quarters of the economists just surveyed by Bloomberg aren’t worried about it at all.

Instead, they expect the Continent’s inflation rate to reach 2% by October 2019.

Why the optimism?

Many of them are encouraged by November’s headline inflation number of 0.6%, a 2-year high.

But let’s recall this quip from American author and humorist Mark Twain:

Facts are stubborn things, but statistics are more pliable.

Yes, there’s another way of looking at Europe’s inflation data: Core inflation, which leaves out volatile food and energy prices, is at 0.8% and has not budged for four months.

EWI’s January European Financial Forecast showed this chart and said:

The chart depicts Bloomberg’s Euro-Area Supercore Inflation Index, which tracks about one-third of the items in the core inflation basket.

You can judge for yourself, but we see no turning point in sight. What we do see is a line that has careened downhill for the better part of a decade. More important, even the ECB’s own policy initiatives paint a picture that is much different from their rhetoric. If the economic picture were strengthening, the governing council would rein in stimulus to prepare for an inflationary uptick. Instead, on December 8, the central bank expanded its quantitative easing program to exceed €2.2 trillion by the end of 2017.

Also of note, in September 2014, the ECB itself explained supercore inflation as a smoother inflation measure that makes it “easier to gauge turning points.” (Bloomberg, March 1, 2016)

Apparently, the central bank and many economists are minimizing the Supercore Inflation Index’s long downward trend.

And there are other troubling signs that the threat of deflation has not disappeared. A notable one is historic. This Bloomberg chart (Dec. 7) of British wage growth goes back 200 years.

The Bank of England governor described the economy as experiencing its “first lost decade since the 1860s.” Citing wage growth that’s at its slowest since that period, he said globalization for some has come to be associated with low pay, job insecurity and inequality. …

Not even the Great Depression or two world wars produced a period of falling real wages like the present one, BOE data show.

Remember, this downtrend in British wage growth has persisted as the FTSE climbed to a new all-time high.

When the inevitable bear market arrives, this may set the stage for yet another “lost decade.”

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