ECRI: Worldwide Inflation Plunge Still Continues

The Economic Cycle Research Institute (ECRI) has released its November 2008 Future Inflation Gauge (FIG) for Europe, U.K., Japan, and Korea. The value of these FIG indexes lies in their ability to predict cyclical turns in inflation.

The complete disintegration of inflationary fears has allowed the central banks around the world to slash interest rates and expand credit facilities in a desperate bid to stabilize the crashing world economies. As the world’s economies are so closely coupled, the inflationary pressures of America’s major trading partners – and their Central Bank’s reaction to these pressures – affect Main Street.

This ECRI release follows the Bank of England rate cut for the second month in a row to reduce benchmark interest rates (down 50 basis points to 1.5%). This is the lowest interest rates in England in 315 years. The ECB (European Central Bank is expected to cut rates further in their meeting on 01/15/09. The rate of the Bank of Japan was recently lowered to 0.1%. Bank of Korea cut its benchmark rates 50 basis points this morning to 2.5% - the fifth time in three months.

I would like to thank Lakshman Achuthan of ECRI for allowing the publication of these Future Inflation Gauges on Seeking Alpha. It is pretty obvious from the timing of the Central Banks rate changes that the world is watching this data. He also offers the following additional comments relating to this month’s releases:

Eurozone:

The recession is eviscerating European inflation pressures with the Eurozone Future Inflation Gauge seeing its largest two-month drop in 33 years.

United Kingdom:

The U.K. Future Inflation Gauge, which plummeted well before inflation plunged and the BOE started slashing rates, has now dived to an 11-year low. Thus, U.K. inflation is set to decline even further in coming months.

Eurozone

Eurozone inflationary pressures dropped further in November, according to ECRI's Eurozone Future Inflation Gauge (EZFIG).

The EZFIG plunged to 97.9 (1992=100) in November from 102.1 in 103 .0 October, as did its smoothed annualized growth rate to -16.6% from -10.4%. The EZFIG was pulled down by falling inflationary pressures in Germany, France and Spain, partly offset by an uptick in Italian inflationary pressures.

Inflation in the Eurozone has turned down sharply, as anticipated by the earlier downturn in the EZFIG. With the EZFIG falling to a three-and-a-half-year low, having experienced its biggest two-month decline in 33 years, Eurozone inflation is set to decline further.

• Germany – German inflationary pressures plummeted in November, according to ECRI's German Future Inflation Gauge (GFIG). The GFIG dived to 94.8 (1992=100) in November from 103.5 in 100 .0 October, as did its smoothed growth rate to -25.5% from -12.3%. The gauge was pulled down by disinflationary moves in measures of raw materials prices, interest rates, money supply, loans, orders and import prices, offset in part by an inflationary move in a measure of joblessness. German inflation has receded dramatically in recent months, as predicted by the earlier cyclical downturn in the GFIG. With the GFIG continuing to drop sharply, German inflation is set to continue its rapid retreat.
• France – French inflation pressures dropped in November, according to ECRI's French Future Inflation Gauge (FFIG). The FFIG declined to 100.9 (1992=100) in November from 101.3 in October, as did its smoothed growth rate to -3.5% from -3.1%. The gauge was pulled down by disinflationary moves in measures of joblessness, input prices and orders, offset in part by an inflationary move in a measure of interest rates. As anticipated by the earlier plunge in the FFIG from its July 2007 high, French inflation has dropped sharply. Meanwhile, with the FFIG continuing to fall, French inflation pressures remain in full retreat.
• Italy– Italian inflationary pressures remained subdued in November, according to ECRI's Italian Future Inflation Gauge (IFIG). The IFIG rose marginally to 100.8 (1992=100) in November from 100.4 in October, as did its smoothed annualized growth rate to -3.1% from -4.2%. The gauge was pushed up by an inflationary move in a measure of money supply, mostly offset by disinflationary moves in measures of interest rates and supplier deliveries. Italian inflation fell further in November, as anticipated by the earlier cyclical downturn in the IFIG, which remains close to October’s three-year low. Thus, Italian inflation should continue to ebb in the coming months.
• Spain– Spanish inflationary pressures dropped steeply in November, according to ECRI’s Spanish Future Inflation Gauge (ESFIG). The ESFIG nosedived to 95.4 (1992=100) in November from 102.6 in October, as did its growth rate to -35.2% from -29.1%. The gauge was pulled down by disinflationary moves in all available components. Spanish inflation has plummeted, as predicted by the earlier plunge in the ESFIG. Meanwhile, the ESFIG fell further to a 15-year low in November, indicating that Spanish inflation is likely to continue its steep decline in the months ahead.

Japan

Japanese inflationary pressures decreased again in November. The JFIG edged down to 97.9 (1992=100) in November from 98.0 in October, as did its smoothed annualized growth rate to -1.3% from -1.1%, due to disinflationary moves in measures of joblessness, commodity prices and import prices, mostly offset by an inflationary move in a measure of employment.

As anticipated by the earlier downturn in the JFIG, Japanese inflation has now declined for the fourth consecutive month. Meanwhile, with the JFIG now dropping to a four-year low, Japanese inflation should continue to retreat.

Korea

Korean inflationary pressures dived in November. The KFIG plunged to 96.6 (1992=100) in November from 99.3 in October, as did its smoothed annualized growth rate to -8.1% from -3.5%, due to disinflationary moves in all available components.

Korean inflation has retreated substantially in recent months, as predicted by the earlier cyclical downturn in the KFIG. Meanwhile, the KFIG declined dramatically in November to a nine-and-a-half-year low. Thus, Korean inflation is set to recede further in the coming months.

United Kingdom

U.K. inflationary pressures continue to recede rapidly. The UKFIG plunged to 101.7 (1992=100) in November from 104.1 in October, as did its smoothed annualized growth rate to -15.4% from -12.3%, due to disinflationary moves in all available components, except for a measure of money supply that edged up.

U.K. inflation has fallen sharply, in line with the downturn in the UKFIG, which has now dived to an 11-year low. Thus, U.K. inflation is set to decline further.

Disclosure: no positions

Comments

[Futurist:]

These are interesting numbers but what do they mean? If I'm looking 12-24 months out how will they affect the markets? My simplified view is that deflation not disinflation is here. Governments can try to stem the effects of deflation but they can not stop it from occurring. This looks like a 24 more month deep reccession to me.
I would love to hear why I'm mistaken.

Jan 09 08:02 AM

[Moon Kil Woong:]

Thanks for the data. The deflationary cycle is hitting the world. That means asides from the US making their currency worthless global deflation can not be combatted by a single company unless it is willing to wall itself off from all cheaper overseas products. The US is the last country that can afford to do that considering most everything we consume is coming from overseas.

Sadly single country stimulus is largely ineffective, although it keeps elected officials popular, especially when it's going to their lobbyist supported industries.

Jan 09 11:40 AM

[John Lounsbury:]

Steven - - -

It is interesting that the Eurozone FUTURE Inflation Gauge shows its first drop in September, just when the current deflationary trend took hold. Perhaps in this case it should be renamed to use the word CURRENT. Many of the individual country gauges have shown drops preceeding the Eurozone indicator, so it may be that this coincident behavior is a relatively rare event. (This coincidence is a coincidence?)

Looking over all the charts presented, I am tempted to guess that a return to inflationary pressure will follow by 0-12 months upturns in the future inflation gauges. This guess is subject to more informed opinion when I have a broader historical data reference.

I hope you will be able to follow these indicators and keep us all informed on how they move in the future.

Jan 09 03:39 PM

[Cameron Mit...:]

Steven Hansen, i only come on this site for your input! i've looked at too many other websites and just end up frustrated. I look forward to reading more of these works in the future! Your great! also the ECRI I truly think what they are doing in ground breaking and a great stepping stone to advancing the work in the economic and business cycle.
I think with the indicators of the next two quarters at least till summer we'll see a downturn-Lakshman predicts with the leading indicators pointing and accelertating downward.
If i was going to say anything that might avert this course then possibly it would be the obama stimulas as with the global stimulas that might put a floor under this recession.

Jan 09 04:16 PM

[Jubilee Year:]

If I interpret this correctly, the coming deflation will suck up all bailout and stimulus funds. How much Quantitative Easing would they have to do to reverse the trend? Is it even effective at all? Or is it just good money being throw after bad?

Jan 09 06:22 PM

[scotty1560:]

good article Steven as always...

does the de-flation translate into a stronger dollar for a few more quarters?
Does a stronger dollar keep oil and gold in check for the time being?

Jan 09 08:57 PM

[Steven Hansen:]

Thank you for commenting.

I do not interpret ECRI data in this article or as a comment. To do so, IMO would presume I have the same stature as ECRI. I am only a humble student of the economy who admires the abilities of ECRI.

I do, however, have a weekly article (being submitted at this time for publication) which uses this data. There I interpret how how this, and many more fundamentals, effects your investing decisions.

Steven Hansen

Jan 09 11:53 PM