Prices Plummet in Europe as Deflation Returns

When the world could use some uplifting economic news, Europe delivers a nasty blow. China is slowing, another recession is prowling toward Japan, and now the Eurozone has skidded back into deflation.

Preliminary data for September showed a 0.1% drop in consumer prices across the Eurozone—the first negative reading for inflation since March, when the European Central Bank started pumping 60 billion euros per month into region’s markets, attempting to galvanize economic activity and boost prices.

Analysts expected inflation to hit a plateau this month, and the subpar reading can be entirely articulated by a sharp decline in energy prices. With commodity prices and oil still stuck in the basement, deflation is likely to persist in the near term. Prices should begin to rise again toward the end of the year, economists say.

However, consistently high unemployment—fixed at 11% in August—along with recent strength in the euro (which means cheaper imports) will likely ensue weaker recovery, if any, and could influence more calls for the ECB to expand its bond-buying program.

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Howard Archer at HIS Global Insight said it would be a long and grueling trek before European inflation achieves ECB’s target of slightly below 2%. He notes that it is “increasingly unlikely to happen until 2018.”

The ECB’s quantitative easing, a one trillion euro program, will continue for at least another year, but the central bank has clearly stated that the program could be extended if necessary.

China’s slowing economy has already hampered Europe’s recovery. Earlier this month, the ECB retracted its forecasts for Eurozone GDP growth for both this year and the next. President Mario Draghi said that the central bank could increase the size of its asset purchases, thereby extending the program.

“We may see negative numbers on inflation in the coming months,” Draghi said. After cutting interests rates as low as possible, Draghi enacted a massive stimulus program earlier in the year in an attempt to fire up growth and inflation.

A global slowdown derailing Europe’s recovery could further muddle the debate over whether or not the Federal Reserve should increase interests rates in October or December.

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