Industrial producer prices on free fall and stagnant output

BusinessEurope Day on the occasion of the publication of the Blueprint for Industrial Competitiveness entitled "Industry matters: Recommendations for an industrial compact". Michael Rake, Chairman of BT Group plc and President of the Confederation of British Industry (CBI), Ingo Kramer, President of the Confederation of German Employers’ Associations (BDA), Pierre Gattaz, Chairman of the Executive Board and President of the Executive and Strategic Committee of Radiall, President of the Movement of French enterprises (Medef), and Antonio Tajani, Vice-President of the European Commission in charge of Industry and Entrepreneurship (from right to left). (EC Audiovisual Services, 28/01/2014).

BusinessEurope Day on the occasion of the publication of the Blueprint for Industrial Competitiveness entitled “Industry matters: Recommendations for an industrial compact”. Michael Rake, Chairman of BT Group plc and President of the Confederation of British Industry (CBI), Ingo Kramer, President of the Confederation of German Employers’ Associations (BDA), Pierre Gattaz, Chairman of the Executive Board and President of the Executive and Strategic Committee of Radiall, President of the Movement of French enterprises (Medef), and Antonio Tajani, Vice-President of the European Commission in charge of Industry and Entrepreneurship (from right to left). (EC Audiovisual Services, 28/01/2014).

 

During the last few days, Eurostat, the EU statistical service, has produced disappointing data on the Eurozone economy. Last week it was a fall of the volume of retail sales in December by 1.6%, compared to November. Also in December last year compared with December 2012 the retail sales index decreased by 1% in the euro area. Yesterday the statistical service announced that industrial production fell by 0.7% in euro area during December in relation to November 2013. According to the same source, average industrial production for the year 2013, compared with 2012, dropped by 0.8% in the euro area and by 0.5% in the EU28.

Austerity and falling prices

Even more discouraging was the announcement that in December 2013, compared with December 2012, industrial producer prices decreased by 0.8% in the euro area and by 0.6% in the EU28. The thing is that industrial producer prices are a strong indication of core inflation developments. This is an indication that nobody referred to while discussing the disinflation issue in the Eurozone. There is a lot of talk lately going around about the falling inflation (disinflation) in the euro area. The International Monetary Fund recently warned European decision makers about the possibility of Europe’s economy entering a vicious cycle of austerity and falling prices that is negative inflation (deflation).

The issue has acquired global political dimensions with the US and the IMF openly and loudly blaming Germany, for imposing on itself and the Eurozone an unneeded austerity policy, which may prove detrimental even to the world economy. The Americans argue that the surplus European economies like Germany and others should increase their internal demand, by applying appropriate anti-austerity policies. In this way Germany is to help itself and fellow Eurozone countries in dire straits, to raise growth gear. By the same token Europe will help the entire world grow at a higher tempo. Otherwise Europe may end up in the dangerous negative part of the inflation diagram. Not to forget that negative inflation is associated with the worst real economy crisis of the last hundred years, from 1914 onwards.

Industrial prices on a free fall

Coming back to industrial producer prices, Eurostat observed that the “average industrial producer prices for the year 2013, compared with 2012, dropped by 0.2% in the euro area”. In December 2013, compared with December 2012, prices in total industry, excluding construction and the energy sector, fell by 0.3% in the euro area and by 0.1% in the EU28. Prices in the energy sector decreased by 2% and 1.5% respectively. Intermediate goods dropped by 1.7% in the euro area and by 1.5% in the EU28. Industrial producer prices (total industry) in the Eurozone, on a yearly basis, keep falling continuously after August 2013 (August -0.9%, September -0.9%, October -1.3%, November -1.2%, December -0.8%).

Let’s suppose that energy industrial goods do not represent home economic structures, because their prices are closely related to the relevant international market. According to the data of the previous paragraph this leaves us with the falling prices in ‘total industry’ and the ‘intermediate goods’. Still overall inflation rate in January was in positive grounds at 0.7%. This fact offered to Mario Draghi, President of the European Central Bank, the opportunity to dismiss the fears of deflation hitting the Eurozone. However, the ECB’s mandate states clearly that the central bank should take measures, if inflation is persistently diverging from the set target, which is 2%.

Deflation fears

Monotonously all ECB dignitaries recite that the inflation target is below but near 2%. Only yesterday the ECB cut down its inflation estimate for 2014 to 1.1%. Obviously, this is not close to 2% but Berlin doesn’t let the central bank do anything about it, like helping the south to grow again. Incidentally, inflation in Greece reached even -3.5% on a yearly basis. But Germany doesn’t care if half the Eurozone is practically in a deflation trap, as long as the Teutonic psychological deficiencies related to imaginary inflation fears, are taken good care of by the ECB.

The problem is, though, that when disinflation is to reach Germany, the situation may be irreversible, because nobody can tell what the reaction of the capital markets may be with the slightest negative indication.

 

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