Eurozone to enter the winter…

Euro area annual inflation and its main components (%), October 2012 and May – October 2013.

Eurostat table

Eurostat table

On many occasions during the past few months the European Sting has concluded that the ongoing deceleration of inflation in Eurozone is a bad omen. Last time it was on Friday 1 November when Eurostat announced its flash estimate for October inflation at 0.7%, after the 1.1% for September. This was an alarming development, with the consumer prices rate of change losing one-third of its dynamic in the short interval of thirty days.

Inflation counts

According to Eurostat, “the main components of the euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in October (1.9%, compared with 2.6% in September), followed by services (1.2%, compared with 1.4% in September), non-energy industrial goods (0.4%, stable compared with September), and energy (-1.7%, compared with -0.9% in September)”. Given that the evolution of the energy prices is negative, a superficial reading could attribute the fast falling overall inflation rate to this development.

Unfortunately, the findings of a deeper analysis of the evolution of the price rate of change are even more discouraging. For many reasons the sub inflation index of ‘non-energy industrial goods’ represents better the conjuncture in any economy. In the case of Eurozone, this inflation sub index is estimated by Eurozone at 0.4% in October this year. This percentage followed a slow, continuous and tormenting downward path during the past twelve months. It was 1.1% in October 2012 and ended up at 0.4% last month.

Manufacturing

The sub inflation index of ‘non energy industrial goods’ accounts for less than the one-third of the overall headline inflation. However this indicator represents the core productive heart of Eurozone’s economy. It describes also the ability of the manufacturing industry to place its products on the home and international markets. This observation has a double meaning though. For one thing the capability of Eurozone’s manufacturing sector to keep its selling prices low is a strong indication of satisfactory competitiveness. On the other hand though, this is a warning that the demand for those products is not developing well, on both, the internal and the export markets.

                                          Weights of the main components of the euro are harmonised indices of consumer prices (HICP).

Eurostat graph

Eurostat graph

If the falling tendency of the rate of change of the ‘non energy industrial goods’ prices was accompanied by noticeable economic growth, it would have been a perfect combination. Alas, this is not the case for Eurozone. At the exception of the second quarter of 2013, all along the past three years Eurozone kept losing parts of its GDP. The small positive growth rate of 0.3% of GDP recorded from April to June this year doesn’t change the long-term stagnation outlook of the euro area economy.

Not without good reason the European Central Bank has set the target inflation rate for Eurozone at 2%. The fact that the actual inflation rate is quickly diverging from that benchmark, must have a severe meaning. The usually cautious and low tone President of ECB, Mario Draghi described the growth potential of Eurozone as weak, uncertain and fragmented. It’s very probable that the real prospects are even worse!

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