The euro zone slides into deflation: The good and the bad

Posted: January 7, 2015 in economy
Tags: , ,

TODAY’S figures from Eurostat confirmed what the markets had expected following reports already out from Spain and Germany: consumer prices are now falling across the euro zone. Inflation turned negative in December, with prices down by 0.2% on their level in December 2013. This is the first time that the euro area has experienced deflation since 2009, when headline inflation went below zero for five months (from June till October).As was the case in 2009, the slide into deflation has been caused by the oil-price slump as it feeds through to energy prices. “Core” inflation (which excludes energy, food, alcohol and tobacco), actually edged up in December to 0.8%, from 0.7% in November.Deflation can be good or bad, depending upon what is driving it and how long it lasts. A short burst of deflation associated with an oil-price fall is good, since it acts as a tax cut, boosting consumers’ real purchasing power. That’s a timely boost for the moribund euro-zone economy. Although the single-currency club appears to have avoided outright recession in 2014, growth became so anaemic that it made little difference. Purchasing-manager indices of activity in the services and manufacturing sectors in the final three months of 2014, compiled by data-firm Markit, were the weakest since the third quarter of 2013, suggesting that growth remained feeble in late 2014.Deflation is bad, if it …

via Economic Crisis


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