Much has been made in certain circles of the risks of prolonged deflation in the Eurozone as a potential brake on domestic demand as patient Western Europeans hold off on large ticket item purchases in the hope that the costs will be reduced when eventually they do part with the hard-earned cash and buy them. This has always been to misunderstand the drive in Western culture, in general, to demand instant gratification of consumer wants. This desire has been the driver for the steady rise in personal debt (on credit and store cards as well as loans and overdrafts) which did ease during the Global Financial Crisis, but seems to be gathering pace again. In the UK, consumer borrowing surged by £1.2 billion in the month of February, its biggest monthly rise since 2008 although much of this was on loans and overdraft spending which has a significantly lower interest rate that credit or store card debt.
In any event, consumer inflation within the Eurozone has reversed a four month deflationary trend and returned to zero last month (April), according to figures released by Eurostat. Prices had fallen by 0.1% in March. The European Central Bank inflation target is 2%, so the current level remains very much below the ECB’s desired figure. One aim of the ECB’s quantitative easing policy is to restore a healthier level of inflation to the Eurozone, but the major plank of the policy is to stimulate the Eurozone economy by injecting liquidity into it through the asset purchase scheme. The policy is intended to run until September of next year and will see €1.1 trillion invested in sovereign bonds and other assets.
Energy prices fell by 5.8% in April, however, Brent crude rose by 18.8% over the month which is likely to feed into fuel and energy prices soon, prompting some increase – although the full magnitude of the collapse in oil prices never fed through to the consumer, of course.