Is Europe Entering a Period of Deflation?
The Short Answer
How clear and present is the eurozone's deflation threat?
As my colleagues Jon Hilsenrath and Brian Blackstone explain, mounting deflation fears are partly behind recent selloffs in a wide range of assets across a large part of the world. Europe is the main focus of those concerns, and figures released Thursday by the European Union show why: the annual rate of inflation across the 28-member bloc fell to 0.4% in September, a five year low. Eight of the bloc's members had prices that were lower than in the same month of 2013, five within the eurozone, three without.
So is Europe in a period of deflation?
Falling prices, or very low inflation rates, do not deflation make. Economists aren't worried so much about falling prices as about the threat that consumers and businesses will come to expect prices to continue to fall and will postpone their purchases, pushing prices down further. There is as yet little hard evidence of that kind of behavior in Europe. You might think about delaying the purchase of a new car-it's a big expense, and you may not absolutely have to have the latest model right away. However, figures from the European Automobile Manufacturers Association show new registrations were up 5.6% in July and 2.1% in August, continuing an upward trend that started a year ago.
Anything else we need to look out for?
One other sign that would send alarm bells ringing is an increase in savings. If you aren't spending what you earn because you're waiting for a better deal some months hence, that should show up in the data.
The alarm bells were certainly ringing in the months following the onset of the financial crisis, when the saving rate surged across the eurozone. But the household saving rate-or the share of gross income not immediately spent by households-then fell steadily in subsequent years and has leveled off below its pre-crisis level since mid 2013 (although second-quarter figures will only be released at the end of this month). But consumer spending picked up in the second quarter, and that suggests the saving rate didn't. Of course, one sure way of generating expectations that prices will fall is if they already are doing so, or if the inflation rate steadily creeps towards zero, which is where the eurozone and Europe is now.
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