Is Eurozone heading for disinflation?

Olli Rehn, Vice-President of the European Commission in charge of Economic and Monetary Affairs and the Euro, went to Tallinn the capital of Estonia where he participated in a debate about the future of Europe. (EC Audiovisual Services).

Olli Rehn, Vice-President of the European Commission in charge of Economic and Monetary Affairs and the Euro, went to Tallinn the capital of Estonia where he participated in a debate about the future of Europe. (EC Audiovisual Services).

Under different circumstances a drop of inflation to 1.3% could have been a cause for celebration. It’s not like that now. The fall of the inflation rate to that level in August is a rather negative development. However averages on many instances hide the truth. Eurozone countries in deep recession like Greece and Cyprus or in stagnation like Portugal and Ireland are running negative or near to zero inflation rates, supporting the view that the current tendency of subdue inflation is concomitant to grave economic problems. Even Germany with an inflation rate at 1.6% in August is barely growing. Higher inflation rates are also indicative of economic problems. Holland with a 2.8% inflation rate is also in recession. Let’s follow the facts.

According to Eurostat, the EU statistical service, “August 2013 Euro area annual inflation down to 1.3% EU down to 1.5%”. The same source states that also in August this year the annual inflation rate in member states was “in Greece (-1.0%), Bulgaria (-0.7%) and Latvia (-0.1%), and the highest in Estonia (3.6%), the Netherlands (2.8%) and Romania (2.6%). Compared with July 2013, annual inflation fell in twenty-four Member States and remained stable in three. The lowest 12-month average rates up to August 2013 were registered in Greece (-0.1%), Latvia and Sweden (both 0.7%), and the highest in Romania (4.4%), Estonia (3.8%) and Croatia (3.5%)”. No doubt that inflation rates around or below zero indicate grave growth impediments.

Lower than thought

These latest developments over the August inflation rates justify European Sting’s reservations about the sustainability of Eurozone’s weak and uncertain growth rate of 0.3% recorded during the second quarter of this year. It was the first quarter with an increase of GDP after three consecutive years of continuous recession. Only yesterday the European Sting writer Suzan A. Kane insisted that “Bit by bit the much-advertised resumption of economic activity in Eurozone fades away”.

To analyse this tendency better it is essential to follow developments on the sectoral level. If it was not for the more important sub index of ‘Food, alcohol and tobacco’, the overall inflation rate would have been even lower. Those consumer items account for one fifth of the over-all inflation index and marked a noticeable price increase of 3.2% in August dragging the overall index artificially upwards. According to Eurostat, the inflation index excluding energy, food, alcohol & tobacco was 1.1% in Eurozone much lower than the overall inflation rate.

Real inflation

For good reasons many economic analysts pay more attention to the inflation index excluding energy, food, alcohol & tobacco. For one thing energy prices in the European Union and the Eurozone may be considered as exogenous factors. Let’s see why. The reason is that the largest part of energy goods comes from abroad and its prices are not determined at home. Consequently the energy items do not represent internal developments in the European economy.

As for the other large category of consumer goods ‘food, alcohol & tobacco’, its price determinants also belong largely to non-economic factors. Prices of fruits and vegetables which constitute the largest item in this sub category depend greatly on weather conditions which for obvious reasons are exogenous. For different reasons the same is true for the prices of alcohol & tobacco. Those prices are determined almost entirely by the excise taxation imposed on them. By the same token excise taxes can also be considered as exogenous factors for the productive part of the economy in manufacturing and services.

After this little theory it becomes evident that the ‘real’ inflation rate in Eurozone is not 1.3% but rather 1.1%. However averaging may hide the truth. Again the answer to this last observation is that what is true for the overall inflation rate is also true for the country indices. Given that, the ‘real’ country indices must be also lower than the headline inflation.

In conclusion the steep fall of inflation rate in August justifies the Governing Council of the European Central Bank and its President Mario Draghi, who changed altogether the philosophy of their monetary policies this summer. Instead of a cautious relaxation, they introduced a very strong one and, on top of that, they adopted ‘forward guiding’, informing all economic agents that the monetary policy will stay super relaxed in the foreseeable future. Obviously they did that because they believe that Eurozone’s growth is quite precarious  and they obviously fear that the euro area may be heading towards a disinflation cycle, at least a good part of it. Unfortunately fragmentation is still haunting Eurozone and clearly the leaders of ECB believe that abundant and cheap money could help growth and reduce fragmentation .

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

Will the three major parties retain control of the new EU Parliament?

Germany loves a strong euro; the new Fiscal Councils can deliver despite the Greek chaos and a wider questioning of austerity

Will the European Court of Justice change data privacy laws to tackle terrorism?

The global liberal order is in trouble – can it be salvaged, or will it be replaced?

What does reimagining our energy system look like?

Siemens-Alstom merger: Can Germany and France lobby to circumvent EC’s rejection, against EU consumers’ interests?

Did young people just kill television?

Who is culpable in the EU for Ukraine’s defection to Russia?

How can we measure real progress on the Sustainable Development Goals?

Galileo funding: A ‘small’ difference of €700 million

“Two Pack” approved: Is democracy chased away from Brussels?

CO2 can be a valuable raw material, not just a climate killer. Here’s how

Migration crisis: how big a security threat it is?

The United Kingdom’s decision to leave the European Union will impact young people’s future the most

Safer Internet Day: ‘Be kind online’, says UNICEF, urging action to prevent cyberbullying, harassment

Human rights breaches in Bangladesh, Cuba and Vietnam

Shenzhen just made all its buses electric, and taxis are next

Why do humanitarian crises disproportionately affect women?

Press coverage of migration crisis in Europe: a call for collaborative action

EP President at the European Youth Event: “Your ideas are key in shaping EU’s future”

G20 told crucial COP24 climate change conference ‘must succeed’: Guterres

A young European voice on Grexit: too high a bill and too big a deal!

Address by the President Antonio Tajani at the funeral of Nicole Fontaine

UN chief hails victory of ‘political will’ in historic Republic of North Macedonia accord

Syria: UN chief warns Idlib offensive may set off ‘humanitarian catastrophe’

The Ultimate Career Choice: General Practice Specialist

Athens searches frantically for a new compromise between politics and economic reality

No tears for Cyprus in Brussels and Moscow

‘Never give up’: UN chief urges all who serve, marking UN Day

5 amazing schools that will make you wish you were young again

Mario Draghi didn’t do it but Kim Jong-un did

Project Manager – 2024

Eurozone very close to a sustainable growth path

Why Climate Change Matters for Future Health Professionals

5 ways students can graduate fully qualified for the Fourth Industrial Revolution

Security Council condemns attacks on Afghan security forces which killed at least 27

Does the sharing economy truly know how to share?

Mental health: a medical school’s demand

ECB: Growth measures even before the German elections

Digital Single Market: New EU rules for online subscription services

The US + Britain trivialize mainland Europe, NATO and the EU

Commission’s Youth Initiative fails first hurdle by not sufficiently consulting young people

We have a chance to build the gender-equal workplaces of the future. Here’s how

China is adding a London-sized electric bus fleet every five weeks

Cyclone Idai: emergency getting ‘bigger by the hour’, warns UN food agency

Migration: Commission steps up emergency assistance to Spain and Greece

EU signs with Canada historic trade agreement, others to follow

UN chief welcomes formation of unity government in Madagascar

How young entrepreneurs should be supported: what assistance should governments provide?

CDNIFY @ TheNextWeb 2014

How Asia could be the winner in the US and China’s Belt and Road race

A Sting Exclusive: “The Digital Economy and Industry are no longer opposing terms”, Commissioner Oettinger underlines live from European Business Summit 2015

Why the Greeks forgave Tsipras’ pirouettes around austerity and voted again for SYRIZA

LEAGUE OF YOUNG VOTERS LAUNCHES TOOL FOR YOUNG PEOPLE TO COMPARE POLITICAL PARTIES AHEAD OF EU ELECTIONS

The financial sector cripples Eurozone growth prospects

Eurogroup president swallows statement on savings confiscation

How storytelling can be a force for social change

South Sudan’s foreseen genocide: from “Never Again” to “Again and Again and Again”?

Anti-vaccination: a private choice leading to collective outcomes

Where are people most proud to be European?

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s