Eurozone hasn’t escaped the deflation danger

Press conference by Olli Rehn, Member of the European Commission, on the spring economic forecasts for 2012-2013. (EC Audiovisual Services).

Press conference by Olli Rehn, Member of the European Commission, on the spring economic forecasts for 2012-2013. (EC Audiovisual Services).

Eurostat, the EU statistical service, confirmed its own inflation rate estimate for November at 0.9% in the Eurozone; that is two decimal points higher than in October. However, this doesn’t mean that inflation took the upward path neither does it indicate that growth has already started pressing consumer prices to higher levels. It must be noted at this point that the European Central Bank predicts that inflation will be further reduced next year. Let’s see to it.

European Sting writer Suzan A. Kane on 6 December observed that “In October Eurozone inflation fell to 0.7% and seems to have gained two decimal points in November at 0.9%. ECB’s economists predict even less inflation next year. According to Mario Draghi (President of ECB), “Eurosystem staff macroeconomic projections for the euro area foresee annual Harmonised Index of Consumer Prices (HICP) inflation at 1.4% in 2013, at 1.1% in 2014 and at 1.3% in 2015”.

Discussion about decimals

This discussion about the two decimal points of higher inflation last month is addressed to those who insist that Eurozone has gained a new growth path, albeit slow. They believe that an inflation rate increase of two decimal points is a strong indication of such an attainment. Unfortunately, the above quote by Draghi, predicting lower inflation next year, is enough to rebut the euro area growth argument.

Returning to November inflation, Eurostat estimates “the lowest annual rates were observed in Greece (-2.9%), Bulgaria (-1.0%) and Cyprus (-0.8%), and the highest in Estonia (2.1%), Finland (1.8%) and Germany (1.6%). Compared with October 2013, annual inflation fell in eleven Member States, remained stable in three and rose in thirteen”.

Obviously in recession stricken countries like Greece, consumer prices remain in the downward slope. In this member state the fall of inflation rate is taking unseen before dimensions though. With annual inflation rate at -2.9% in November the country suffers its worst deflation period of the last 50 years. This is an infallible sign that the Greek economy will remain in the negative part of the chart for many months, despite predictions that it will start growing again next year. The Athens government and the Commission don’t hesitate to make positive predictions. The problem is that for at least four years now their predictions always prove to be wrong.

It is even more interesting to follow the sectoral inflation developments in the euro area. Eurostat notes that “The largest upward impacts to euro area annual inflation came from electricity (+0.11 percentage points), accommodation services (+0.09) and tobacco (+0.08), while fuels for transport (-0.23), telecommunications (-0.14) and heating oil (-0.07) had the biggest downward impacts”. In a way, energy prices, including electricity, transport fuels and heating oil are exogenously determined and do not reflect market developments in the internal Eurozone market. This means that even after deducting the repercussions of energy costs in overall inflation, the final outcome will be roughly the same (more expensive electricity, cheaper transport fuel and heating oil).

In conclusion, the current conjuncture in Eurozone’s economy seems rather on the disinflation side rather than in the opposite direction. The danger is that this tendency can be transformed in deflation. Unfortunately, inflation rates below the one percentage unit are close to deflation, despite this increase of two decimal points from October to November this year.

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