Deflation threat looms over Europe

LONDON • Europe is failing to shake off the threat of deflation, with prices falling in Sweden, flatlining in Britain and barely registering any increase in Germany and Italy.

Data released yesterday underlined that central banks across the continent are making little headway in boosting inflation despite flooding their economies with cash through rock-bottom interest rates and/or money-printing.

At the same time, commodity prices, especially for oil, are falling on a number of factors, including an economic slowdown in China, and should feed even lower inflation over time.

"It is a worry in particular in the euro zone, where you still have spare capacity," said Ms Jennifer McKeown, senior European economist at Capital Economics in London. "There is a real risk that this becomes more sustained."

Euro zone industrial production figures for May came in far lower than expected, at minus 0.4 per cent compared with an expected plus 0.1 per cent.

Deflation - the sustained fall of prices - can become an aggravated assault on economies, prompting consumers to put off purchases in search of a better price and hence bringing growth to a halt or worse.

There is no firm sign of that to date, but yesterday's tranche of inflation reports made grim reading for those seeking to get yearly inflation back up to around 2 per cent, a rate many consider healthy.

Germany, Europe's economic engine, reported consumer prices were up just 0.1 per cent year-on-year and fell 0.2 per cent between May and June. Italy fared slightly better, but still saw prices rise only 0.2 per cent.

Consumer prices in non-euro zone Britain were unchanged in June from a year before, taking the inflation rate back to its lowest in more than half a century.

"The main drivers were the ongoing supermarket price war, which is depressing food prices, while there appears to have been more aggressive than usual clothing discounting in June," ING economist James Knightley said in a note.

The European Central Bank has launched a €60 billion (S$90 billion) per month asset-buying scheme, but even with this quantitative easing, inflation is not expected to return to the ECB's target of just under 2 per cent before 2018. Euro zone inflation data is due to be released tomorrow.


A version of this article appeared in the print edition of The Straits Times on July 15, 2015, with the headline 'Deflation threat looms over Europe'. Print Edition | Subscribe