Usually the low inflation rate in the Euro Area is explained by low and downward trending commodity prices. It’s easy to think that the risk of deflation comes from outside.
This is no longer the case. In May commodity prices’ contribution to the inflation rate was null.
We can go further and notice that the situation is worse now than two months ago.At the end of the first quarter, the core inflation rate (March compared to December) was at the same level in 2011, 2012, 2013 and 2014. At the same time, the headline inflation rate was decreasing from 2011 to 2014.
As the chart below shows, the situation has changed when we look at the first five months of the year (May compared to December). The headline inflation rate is still following a downward trend (left part of the chart) but now the core inflation rate is the lowest of the last 4 years (right part)
The lower inflation rate in the Euro Area has also internal sources reflecting imbalances. It’s no longer explainable by commodity prices only. That’s why the ECB had to be more aggressive in its action last Thursday.
.
On the same topic
What to expect this week ? December 2 to 8, 2019
Christine Lagarde at the European Parliament on December the 2nd. Markit and ISM surveys, German industrial orders, the Chinese external trade and US employment. The COP 25 in Spain. Highlights…
Governments against the euro zone
The ECB monetary policy became frankly accommodating only because Draghi had the perception that governments and the Commission would never let go on fiscal policy.
Will Christine Lagarde fall into the same trap as Draghi?
Will Christine Lagarde fall into the same trap as Draghi?
A very relevant column on the new stages of the trade war
This column, “The Case Is Only Growing for an Economic Forever War”, by Shawn Donnan, was posted on the Bloomberg website. President Donald Trump’s trade war with China has become…