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By HaleStewart November 1, 2013 10:45 am
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Is the EU Facing a Deflation Problem?

While it might sound counter-intuitive, an economy needs a little inflation  While the amount is debatable. some inflation indicates there is sufficient consumer demand to keep the economy growing (as too many consumers try to buy too few goods) or enough businesses demand raw materials in the process of providing products (as businesses compete for scarce resources) to drive up raw material prices.  In fact, economists are coming around to the idea that some inflation is a good thing, as noted in this recent piece in the New York Times:

Inflation is widely reviled as a kind of tax on modern life, but as Federal Reserve policy makers prepare to meet this week, there is growing concern inside and outside the Fed that inflation is not rising fast enough.

But recent inflation numbers from the EU indicate the region may be approaching a deflation problem.  Consider this table of the recent EU annual inflation readings from the latest EU inflation report:

In June, the annual inflation rate printed at 1.6%, while in the latest reading the number printed at .7% -- a little over half the June level.

And consider this chart that shows the longer trend:

 

The longer term graph shows that prices are clearly moving lower.

Remember that one of the main drivers of Japan's lost decade was an extended period of deflation.  Placed in that context, the above charts a fairly concerning.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

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