Eurozone stuck in a high risk deflation area; Draghi expects further price plunge

Jyrki Katainen, European commissioner in charge of Economic and Monetary Affairs and the Euro speaks at the plenary session of the European Parliament in Strasbourg about resource efficiency in the EU (Copyright: © European Union 2015 EP).

Jyrki Katainen, European commissioner in charge of Economic and Monetary Affairs and the Euro speaks at the plenary session of the European Parliament in Strasbourg about resource efficiency in the EU (Copyright: © European Union 2015 EP).

This newspaper has been following very closely the Eurostat statistics, including inflation, which paint an accurate picture of Eurozone’s economic condition. Then, not without good reason, during the last few months or even years the European Sting didn’t share the reserved optimism of Brussels about euro area’s prospects and unfortunately Eurostat confirmed this prediction once more. Last Wednesday EU’s statistical service published its flash estimate for September inflation anticipated to have returned to the negative part of the chart at -0.1%. There is more in it though.

Last Friday Eurostat also published its estimate about industrial producer prices found to have dived in August deeply in the negative area with a -0.8% reading. This crucial statistic was again in the negative area during the past difficult years. Throughout the hard winter of 2014-2015 domestic producer prices in manufacturing kept falling for many months in a row.

A dreadful descent of prices

This tendency culminated in December 2014 with a -1.2% reading, hopefully marking the end of the bad times. Since February 2015 this key statistic evolved rather positively for a few months possibly fuelling encouraging thoughts in Brussels. Unfortunately, it turned  negative again in June 2015 with a narrow fall of -0.1%, but this new unfavorable development continued in July with a drop of -0.3% and, as mentioned above, in August with a -0.8%. The deterioration tendency is easy to observe.

Let’s return to the headline consumer price inflation. Understandably, Eurostat’s flash estimate for September is dragged below the zero line by the deep fall of the price of energy. The statistical service says that in September the sub categories of consumer goods prices evolved as follows: Processed food, alcohol & tobacco 0.6%, non energy industrial goods 0.3%, energy -8.9% and services 1.3%. Obviously the energy items have hauled the overall consumer goods inflation to the negative area.

It’s not only energy

This fact has been used by many policy makers and analysts to argue that the Eurozone doesn’t really run any deflation (negative inflation) danger. The idea is that energy is by and large an exogenous factor for the euro area economy, while its proper endogenous price structure is safely anchored in the positive part of the chart. Exactly at this point though a very structural statistic enters in the equation and makes things not so staightforward. This is the domestic industrial producer price index.

Domestic industrial producer prices have a long negative record to show as described above. Despite the fact that cheaper energy inputs may allow domestic industrial producers to sell their products at lower prices, the truth remains that their share in the income distribution shrinks. This is done to the benefit of other sectors, like the services. These other sectors of the economy favored by continuous increases of their selling prices keep gaining an increasing part of the gross domestic income, to the detriment of industry while the overall picture remains deflationary. There is nothing positive in this arrangement especially for the core of the Eurozone economy which undoubtedly is the manufacturing sector.

It’s the industry stupid

As things stand now over the last few months Eurozone entered again in the danger area on both accounts. Both the headline inflation became negative and the domestic producer prices in manufacturing kept falling for many months in a row. And this flagrant deterioration occurred despite the fact that the European Central Bank has injected more than €600 billion into the economy in applying its extraordinary monetary measures (on 25 September 2015 the amount of securities held by the ECB for monetary policy purposes stood at €631bn ).

In short, Eurozone is still in the high risk deflation area, while the latest free money allocation to the banking sector by the ECB (hundreds of billions of it) doesn’t seem to make a difference. The banks continue playing a negative role as during the past years. Even the President of ECB Mario Draghi seemed quite alarmed when he plainly stated on 3 September, “We may see negative numbers of inflation in the coming months”.

Advertising

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

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

‘Abhorrent’ ambulance attack in Libyan capital imperils life-saving work, warns UN

This is why mountains matter more than you think

MEPs approve EU’s spending in 2017

Banking on sustainability – what’s next?

Eliminating hepatitis calls for ‘bold political leadership, with investments to match,’ UN health chief says

The European Sting @ Mobile World Congress 2014, Creating What’s Next for the World. Can EU Policy follow?

World in grip of ‘high impact weather’ as US freezes, Australia sizzles, parts of South America deluged

Von der Leyen on Europe Day: What does Europe mean to me and why is solidarity more valid than ever

How can the EU hit net-zero emissions?

Which role does art play in the COVID-19 pandemic?

5 shocking facts about inequality, according to Oxfam’s latest report

European Youth Vlog

Ocean Conference has potential to be a ‘global game-changer’

These clothes were designed by artificial intelligence

Polio eradication a UN priority, says Guterres in Pakistan visit

Why Trump’s tariffs are good news for US garlic farmers

How the world’s best teacher is changing lives in Africa

Long live Eurozone’s bank supervisor down with the EU budget supremo

Kids who live in the countryside have better motor skills, a study in Finland has found

European Parliament approves new copyright rules for the internet

Parliament criticises Council’s rejection of money laundering blacklist

Batteries included: how better storage can transform renewable energy

Eurozone: A crucial January ahead again with existential questions

Tobacco in Pakistan: is it worth to burn your money?

The racial wealth gap in the US is affecting its citizens and its economy – this is how

WEF Davos 2016 LIVE: “We need more Schengen but reinforce control!”, France’s Minister of Economy Emmanuel Macron emphasises from Davos

In aftermath of Libya airstrike deaths, UN officials call for refugees and migrants to be freed from detention

Action needed to end deadly clashes between African herders and farmers: UN chief

France-Germany: Divided in Europe, USA united in…Iran

Italy can stand the US rating agencies’ meaningless degrading

Brazilian public health system and universality: a forgotten right!

Last-chance Commission: Why Juncker promised investments of €300 billion?

New Iraqi Prime Minister-designate urged to act on reforms and accountability

High-tech or ‘high-touch’: UK survey gives clues to the jobs of the future

Business models inspired by nature are the future

US cities are going to keep getting hotter

EU cracks under the weight of its policy on the Ukraine-Russia nub

How wealthy people transmit this advantage to their children and grand children

London is becoming the world’s first National Park City

2018 Golden Pen of Freedom Awarded to Maria Ressa of the Philippines

The cost of housing is tearing our society apart

Here’s how India became a global clean energy powerhouse

What can we do about the crisis in trust in public institutions?

Myanmar willing to repatriate ‘verified returnees’ from Bangladesh

These are the most innovative cities in the world

Time to make a fundamental choice about the future of healthcare

Eurozone: Avoiding a new Greek accident

The world needs carbon-neutral flying. Here’s how to bring it one step closer

‘An unprecedented fiscal response’ – political and business leaders on managing the coronavirus crisis

Is the EU competent enough to fight human smuggling in 2015?

How we overhauled healthcare amid Venezuela’s crisis

Here’s how drone delivery will change the face of global logistics

MasterCard at European Business Summit 2015: A focus on innovation will drive inclusive economic growth for Europe

This Chinese tech giant’s latest gadget is… a bus

Can we understand how the universe was formed? A young scientist explains

Lack of access to clean water, toilets puts children’s education at risk, says UN

Boat made of recycled plastic and flip-flops inspires fight for cleaner seas along African coast

Russia and the West to partition Ukraine?

European Labour Authority starts its work

World food security increasingly at risk due to ‘unprecedented’ climate change impact, new UN report warns

More Stings?

Advertising

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