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Eurozone Deflation Rate Increases

By Dr. Mike Campbell
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.

It shouldn’t come as a surprise to anybody that prices in the Eurozone continued to fall in December. Data from Eurostat show that the rate at which prices are falling picked up from -0.2% in November to -0.6% last month (year-on-year data). If energy and food costs are stripped from the data, the residual inflation was actually 0.5% higher in December 2014 than a year earlier. Energy prices fell by a substantial 8.9% in January.

The concern over deflation is that it can cause a suppression of demand because consumers realise that more expensive items may become cheaper in the coming months and so put off making a purchase now. This phenomenon has been widely blamed for slugging domestic demand in Japan, for much of the last 20 years, or so, and is why the Abe administration is deliberately trying to stoke Japanese inflation to a target of 2%. In Europe, the fear in certain quarters is that deflation will place further downwards pressure on the low rate of Eurozone growth, for the reasons just given. However, I think that misses a major psychological difference between Japanese and European societies. Europeans are more willing to purchase goods on credit (most often via credit cards) than their Asian counterparts and tend to want to have consumer products immediately, rather than after saving for them. If this supposition is true, falling prices in the Western world are more likely to increase demand rather than flatten it.

Given also that the falling oil price has fed through to some (much lower than justified by the magnitude of the falls) extent, European consumers have a little extra cash available to spend. Furthermore, niggardly pay increases in some nations, such as the UK, have finally overtaken inflation (before it turned negative, I hasten to add), so there has been a slight increase in people’s disposable incomes. With interest on savings across Europe still being pathetically low as a hangover from the Global Financial Crisis, there is little incentive for consumers to save. Europeans love a bargain now, so deflation in Europe could yet prove to have a silver lining.

Dr. Mike Campbell
About Dr. Mike Campbell
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.
 

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