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By HaleStewart April 29, 2014 8:49 am
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Three Charts Show the Growing EU Deflation Threat

Right now, the greatest threat faced by the EU is deflation -- a continued and persistent decline in prices that slows economic activity.  The following three charts highlight the increasing potential of deflation in the EU area.

The chart above is from the latest EU business and consumer survey and shows the inflation expectations of consumers, industry and construction.  Notice especially that consumers expectations of inflation have been declining since the beginning of 2011.  And notice especially the precipitous drop since the beginning of 2014.

 

The two charts above are from the same report.  The top chart shows the current level of capacity utilization in each country (the red "notch") which the vertical line shows each country's specific range of capacity utilization.  The bottom chart shows the overall level of capacity utilization in the EU.  Both charts indicate that industry at both the country and macro (overall EU level) have plenty of room to absorb price increases.  This means there is a very small chance of supply push inflation developing in the region.  

So, the top chart tells us there is little demand pull inflation while the bottom chart tells us there is no supply push inflation.  Put more directly, inflation isn't even close to being an issue for the EU region right now.  Most importantly, consumers (the very top chart) are very clearly moving closer to deflationary expectations, which could have devastating consequences for the economy if not reversed.

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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