European Inflation

Eurostat issued a flash indicator last Friday to the effect that eurozone inflation has fallen unexpectedly from 1.9% to 1.6%. I say unexpectedly, but of course this is, in many ways, one of the foreseeable consequences of the euro rise.

For many this will undoubtedly be good news. The important point to bear in mind, however, is that this number is an average for the entire eurozone, so while there will be those whose inflation is significantly above the figure, there will also be those significantly below. One thinks immediately of Germany here. Of course this is only a ‘flash’ estimate, we await confirmation, and a detailed breakdown. But could it be that German inflation is begining to hover dangerously close to that 0% watermark? This latest data will undoubtedly raise the pressure on the ECB to lower interest rates when it meets later this week. However the decision is far from being a foregone conclusion. There are still a wide variety of views available – one for every taste and preference – on which way the eurozone economy is headed, and on which is the greatest present threat and danger, inflation or its converse: deflation.

Also please note that on Thursday US Federal reserve governor Bernanke was saying that US inflation was “under very good control”. He, at least, has his priorities clear.<

Hopes of a cut in European interest rates next week to relieve the pain inflicted by the strong euro rose yesterday after official figures showed inflation on the Continent dropped to a four-year low this month.

The euro fell on the news, which was compounded by an unexpected upward revision to the latest US growth figures that boosted hopes of a sustainable economic revival for the world’s largest economy.

Eurostat, the European Union’s statistics agency, said its “flash” estimate of inflation in the 12-nation area slid unexpectedly to 1.6 per cent, the lowest since November 1999 and well below the European Central Bank’s 2.0 per cent target.

Jean-Pierre Raffarin, the French prime minister and Gerhard Schroder, the German chancellor, added to pressure on the ECB by calling for a rate cut to stem the euro’s 14 per cent advance against the dollar in the past six months.

Robert Prior, a European economist at HSBC, said: “This will lead to further speculation that the ECB will cut interest rates, possibly as early as next week.”

But he said that although recent economic data had been weak – GDP slowed to 0.3 per cent – the euro’s recent fall would probably encourage the ECB to delay any rate cut until further evidence came in.

Martin Essex, senior economist at Capital Economics, said a rate cut next week could not be ruled out but added: “We believe the ECB will wait until later in the year by which time inflation will have fallen further and the impact of the euro will have become clearer.”

The euro fell as low as $1.2374 and has now lost more than five cents from last week’s record high of $1.2930.

Separate figures showed the US economy rose at a 4.1 per cent annual rate in the fourth quarter of 2003, just above the 4 per cent gain initially reported a month ago.

Taken together with the third quarter’s meteoric 8.2 per cent surge, growth in the second half of the year was the strongest back-to-back quarters since the first half of 1984.

Business spending on equipment and software was more robust than first thought, firms added to inventories at a faster pace and exports were stronger.

On Wall Street, the Dow Jones rose 3.78 to 10,583.92. Falling back from an earlier rally of stocks, which had been buoyed by a report on industrial production in Japan, which sent the Nikkei 225 to its biggest gain in more than two months.

However analysts said the strong GDP number was unlikely to force the hand of the Federal Reserve to raise interest rates in light of comments on Thursday by Ben Bernanke, a Fed governor, who said inflation was “under very good control”.

Later figures yesterday showed US consumer confidence declined this month, while an index of mid-West manufacturing slipped.
Source: The Independent

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

2 thoughts on “European Inflation

  1. on Thursday US Federal reserve governor Bernanke was saying that US inflation was “under very good control”. He, at least, has his priorities clear.

    Edward, you need to develop an ear for besides-the-point jawboning:
    While inflation itself is within a comfortable range, the risk of future inflation has almost never been greater in the Fed’s history.

    (link taken from Angry Bear)

  2. The risk of future inflation probably is higher than usual, but the leading indicators should have shown in the actual inflation figures by now. The Fed’s optimism, while perhaps misguided, is not totally unjustified. I would chalk a good part of the unexpectedly good US numbers up to Asian currency manipulation.

    More to the point (and the reason for this belated response) is the issue of the Euro inflation rate. The Economist has an article
    on the subject with a rather striking graph (link may require subscription).

    However, if you look a little more closely at the graph, it is a little less striking. The most recent plunge looks like a solid trend, but half of the plunge is in the latest (preliminary) figures. Half of the remainder is the normal fluctuation. But that troublesome middle period in the recent drop (there are three segments in the drop, if you look closely) establishes more of a trend, although it is still not a strong one. Inflation rates jump around a great deal more than that graph displays.

    (BTW, if I ever produced a graph without the data points clearly marked like that, I’d fire myself.)

    The preliminary figures are probably correct, and the Euro may be finally showing a long-expected problem. The US may be next in line to show problems that should have arrived months ago. If you are actively seeking signals of impending doom, this isn’t a bad place to start.

    P.S.: There’s also a generic summary of more general Eurosceptic “signals of impending doom” in that same issue in “The forward march of European integration seems in peril”, another current article in The Economist. It’s no real news, however.

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