Europe Remains Stuck In Deflation For Second Month


The last time Europe had at least two consecutive months of deflation was in late 2014/early 2015 when the ECB launched its sovereign QE, and when prices staged a modest rebound into the rest of the year. One year later, it’s more of the same, and as Eurostat revealed earlier today, after a headline price drop of -0.2% in February, March prices declined once more, this time by -0.1% in line with expectations, driven by a -8.7% plunge in energy prices.

The good news for the ECB, which earlier this month unleashed the first instance of corporate bond QE, is that if stripping out “volatile food and energy prices”, core inflation accelerated in what Reuters dubbed mildly positive news for the European Central Bank as it struggles to revive anemic price growth.

As shown below, core inflation, a figure closely watched to gauge underlying trends, picked up to 0.9% from 0.8%, also in line with its recent trend and with expectations, alleviating some fears that low energy prices are feeding into the cost of other goods and services.

According to Reuters, the core inflation tick-up, presaged by surprisingly high German figures on Wednesday, is the latest in a string of slightly positive data for the 19-nation currency bloc, indicating that the euro zone’s tepid domestic recovery remains on track despite headwinds from abroad.

The ECB especially fears these so-called second-round deflationary effects from falling crude prices as they could lead to low price growth becoming entrenched.

Still, inflation remains far below the ECB’s target of nearly 2 percent and is not expected to return to target over the next three years. This indicates the central bank will have to keep rates exceptionally low and keep the door open to even more stimulus.

Indeed, according to its most recent drastically lowered forecast, the ECB expects inflation to average just 0.1 percent this year before a pickup in 2017.

In the end, it will all depend on what oil prices do from here: crude oil prices have fallen by two-thirds over the past two years and futures point to a slow rise for the rest of the decade, keeping a lid on price growth.

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