Half Full, Half Empty Or Too Big Of A Glass?

Includes: FXE
by: Marc Chandler


Except for three eurozone countries, disinflation not deflation.

Low inflation extends beyond euro area.

What if lowflation is a symptom of a deeper problem - lack of demand?

This Great Graphic was posted by Alen Mattich at the Wall Street Journal. The red bar shows the average CPI in the 2000-08 period. The blue bar shows the latest inflation.

That was before today's reports. These include France, where the year-over-year rate in June slipped to 0.6% from 0.8%, and the Netherlands, where the year-over-year rate ticked up to 0.3% from 0.1%. The uptick in the year-over-year rate comes despite the second consecutive 0.3% fall on monthly basis.

Outside of the euro area, but including in chart here, Sweden and Norway reported inflation figures today. Sweden, where the Riksbank overcame objections by the Governor and Deputy Governor to cut interest rates by 50 bp last week, saw firmer prices. The CPI rose 0.2% in June for a 0.2% year-over-year pace, up from -0.2% in May. The underlying rate, which used fixed mortgage interest rates, also rose by 0.2%, and doubled the year-over-year rate to 0.8% from 0.4% in May.

Norway, where the Norges Bank has sounded a bit dovish, saw its year-over-year CPI tick up to 1.9% from 1.8% in May. The underlying rate, which excluded taxes and energy, rose 2.4%.

It is too early to expect the ECB's rate cuts, including a negative deposit rate, and Sweden's rate cut to show up in economic or price data. However, while we recognize the resilience of the euro against the dollar (where it remains stuck in a $1.35-$1.37 trading range), we note that it has pulled back on a trade-weighted basis (BOE trade-weighted calculation) from a three-year high at the end of last year that was retested in March. By the middle of last month, the euro's trade-weighted index had eased 2.7%. It has risen about 0.5% since.

This lower chart was tweeted by David Powell, a Bloomberg analyst. It shows the inflation in the various members since 2004. The table shows that three euro zone countries, Estonia, Greece and Portugal, are experiencing an outright decline in consumer prices.

European officials are comprehending the disinflationary forces and the risk of deflation as a monetary phenomenon. So they cut rates and the ECB introduces TLTROs.

What if prices are a symptom of something deeper going on that cannot be addressed by monetary policy? What if the problem, as seen in today's miserable industrial production numbers for France, Italy and the Netherlands, is the absence of demand? France and Italy want to a more liberal interpretation of the Stability and Growth Pact fiscal rules, but they argue from a position of weakness, having not enacted structural reforms that have previously been agreed.

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