Eurozone has practically entered a deflation trap

Antonio Tajani, Vice-President of the European Commission in charge of Industry and Entrepreneurship (addressing the audience from the panel table), travelled to Rome to participate in the launch of the Raw Materials University Day, at the Sapienza University. The initiative was organised in the framework of the communication strategy of the European Innovation Partnership (EIP) on Raw Materials, which aimed to promote sectorial competitiveness, sustainable growth and employment by showing the huge potential of European raw materials. (EC Audiovisual Services, 06/12/2013).

Antonio Tajani, Vice-President of the European Commission in charge of Industry and Entrepreneurship (addressing the audience from the panel table), travelled to Rome to participate in the launch of the Raw Materials University Day, at the Sapienza University. The initiative was organised in the framework of the communication strategy of the European Innovation Partnership (EIP) on Raw Materials, which aimed to promote sectorial competitiveness, sustainable growth and employment by showing the huge potential of European raw materials. (EC Audiovisual Services, 06/12/2013).

With consumer price developments in Eurozone remaining below the one percentage unit for many months now, disinflation (falling inflation) is just some decimal points away from deflation (negative inflation). Yesterday, Eurostat, the EU statistical service, released its estimate for the December headline inflation at 0.8% , down one decimal point from 0.9% in November.

This announcement would not have been so much alarming, if at the same time Eurostat hadn’t revealed that the industrial producer price inflation index in November was down to -0.1% (deflation) in both euro area and the EU28. This is actually the second month in a row that industrial producer prices on the domestic market appear in the negative part of the graph. In October 2013 the inflation index for ‘Total industry excluding construction’ fell to -0.5%. If this tendency continues, deflation will be a tangible and dreadful prospect for Eurozone. Not to forget that the European Central Bank has set its target for overall inflation at below but close to 2%. Readings below one percentage unit are way far from ECB’s target.

Deflation haunts industry

On many occasions the European Sting has observed that the evolution of headline inflation reveals the real internal developments in any economy. A few months ago the Sting writer Suzan A. Kane stressed that, “…energy prices in the European Union and the Eurozone may be considered as exogenous factors. The reason is that the largest part of energy goods comes from abroad and its prices are not determined at home…As for the other large category of consumer goods ‘food, alcohol & tobacco’, 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 also exogenous. For different reasons the same is true for the prices of alcohol & tobacco. Those prices are determined almost entirely by excise taxation imposed on them”.

This said, the items ‘Non-energy industrial goods’ and ‘services’ remain the major constituent parts of the overall inflation index which closely follow  internal cost developments in the productive sector of any economy. Those two categories represent between them 69.66% of consumer spending, accounting for the bulk of family budgets. Incidentally, Eurostat revealed that both sub-indexes of these two major consumer spending categories have been constantly declining from December 2012 to the last month of 2013. During the past twelve months the rate of change of the index for ‘Non-energy industrial goods’ fell from 1% in December 2012 to a mere 0.2% last month, while the ‘Services’ price index receded from 1.8% to 1% in the same period.

Wrong policy mix

Let’s pass now to the other Eurostat announcement about the price index of ‘Total industry excluding construction and energy’. Its rate of change remained negative all along the last six months from June 2013, with an average reading of -0.1%. It’s unquestionable then that price developments for the industrial goods sector in Eurozone remain in the deflation region for many months now. With the manufacturing sector being at the heart of the European economy though, it’s beyond doubt that Eurozone is already faced with deflation.

It’s high time then that Brussels and Berlin should rethink the austere economic policy mix applied in Eurozone, if the euro area is to avoid a long recession period, with inflation oscillating above and below zero. Japan lost an entire decade caught in a similar deflation trap.

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