One difference between economists and consumers is that economists don’t like to see falling prices. The reason underlying this bizarre fact is that falling prices may trigger a deflationary spiral which could put a dent into already weak consumer demand around the world, but more specifically in Europe. The argument goes that if consumers know that high(er) ticket items will be less expensive in a few months’ time, they may delay purchasing them until the price drops. This has the effect of dampening consumer demand which can hurt economic growth and, ultimately employment. Japan has struggled with deflation for much of the past two decades, but the effects are offset somewhat by Japan’s position as a major exporting nation where domestic consumption is a smaller component of the nation’s output.
The Eurozone’s 19 nations have slipped into deflation with prices slipping by 0.2% in December 2014 compared to the same month in 2013, according to preliminary data from Eurostat. Economists ought not to be too troubled by the decline since it is linked to the decline in the cost of energy which fell by 6.3% year-on-year, meaning that consumer spending per se has not caused deflation. Indeed, if the costs of energy are stripped from the data, inflation within the bloc stood at 0.6%, unchanged from November.
If the price of Brent crude is used as a surrogate for energy costs (not an exact model, of course) then across 2013 prices were fairly flat, rising by 0.8%. However, if the same estimation is made for last year, prices have collapsed by more than 46%. If, as expected, the oil price remains flat or is further subdued (and Brent has fallen from $57 to $51 per barrel since the start of the year) throughout 2015, then energy deflation costs will continue to exert a downwards pressure on Eurozone (and EU-wide) inflation. Of course, lower energy costs ought to mean lower production costs for goods which could also be passed on to the consumer – at least in part. They should also mean that the poor consumer has a bit more cash in his pocket from fuel and energy savings and this could even boost demand (and therefore growth) even pleasing those picky economists!
The Eurozone expanded to 19 members with the accession of Lithuania on New Year’s Day 2015.