Most prices aren’t rising as fast as they were; some are actually dropping. Our November Global Market Perspective reveals the extent of Europe’s price deflation:
Three decades ago, the world’s central banks began to adopt an arbitrary inflation target of 2%. The percentage originated in the late 1980s, when the Reserve Bank of New Zealand formalized inflation targeting. The U.S. Federal Reserve coalesced around a 2% target in the 1990s but waited until January 2012 to adopt the target publicly. The European Central Bank waited even longer, formally targeting 2% inflation after a strategy review conducted in July 2021. Despite getting pulled out of thin air, the 2% target rate now serves an important psychological role, one that the financial community obsesses over.
We, too, watch price inflation closely, because the more it deviates from 2%, the greater the hit to a central bank’s alleged credibility. For September, the Harmonized Index of Consumer Prices (HICP) came in at 1.7% — down from 2.2% in August and just below the ECB’s target rate. Prices are not only inflating at the slowest pace since the second quarter of 2021, but many items in the CPI basket have also begun to decline. Yearly price changes in all 12 of the CPI components depicted on the chart below — including various foodstuffs and furnishings, clothing, games and personal transport costs, as well as industrial goods and information processing equipment — are now below the ECB’s 2% target. Fully nine out of these 12 components show year-over-year price declines, a few of which are running north of 5%:
Inflation has been the financial bogeyman ever since the pandemic, but the financial community shows a dim awareness that the ECB may soon face its old nemesis: deflation. A recent FT headline put it like this:
Specter of Low Inflation Returns to Haunt Eurozone Policymakers
According to the article, minimal price increases raise the “danger of falling into deflationary territory, which can trigger a self-reinforcing downward cycle as consumers postpone purchases while shrinking income makes it harder to pay down debt.” We couldn’t have said it better ourselves. If deflation becomes entrenched, pulling eurozone economies out of the spiral will be nearly impossible.
Along similar lines, our November Global Market Perspective describes an economic setup in the U.S. which appears to be a “forewarning of crisis.” Get the insights you need by following this link.
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