Blog Post

30% of the Euro Area HICP basket is now in outright deflation

A look at the composition of the HICP basket for the euro area shows that the percentage of items that are now in outright deflation has risen to 30% in November 2014, compared to 21% at the beginning of 2014. The percentage of items in “lowflation” (i.e. recording inflation below 1%) has climbed up 10 percentage points, from 45% in January to 55% in November 2014, surpassing significantly the peak in 2010 of 46% of items in lowflation.

By: and Date: December 19, 2014 Topic: European Macroeconomics & Governance

It’s the week before Christmas, and it has certainly not been a reassuring week for the ECB. The staff projections for HICP inflation for the Euro area were lowered to only 0.7% in 2015 and 1.3% in 2016, and HICP inflation for Germany was confirmed at +0.5% for November 2014 and at +0.4% for France. Most importantly, French core inflation turned into the negative territory for the first time since the French statistical office started measuring it (i.e. since 1990). Also, the massive plunge in Brent oil prices (-25% since September 2014) is still not reflected in the published data, but suggests further downward pressure on inflation rates.

A look at the composition of the HICP basket for the euro area shows that the percentage of items that are now in outright deflation has risen to 30% in November 2014, compared to 21% at the beginning of 2014. The percentage of items in “lowflation” (i.e. recording inflation below 1%) has climbed up 10 percentage points, from 45% in January to 55% in November 2014, surpassing significantly the peak in 2010 of 46% of items in lowflation. As already pointed out previously, this is still well below the Japanese basket count with 50-60% items in outright deflation over 2000-2004 and 2009-12, but it is nevertheless an important indicator, as it has been behind the initially dismissive language of the ECB on price developments.

Source: Datastream

The curve of market expectations on inflation has been drifting down since last year

Markets have been incorporating these gloomy developments quickly. The curve of market expectations on inflation (measured here with inflation linked swap rates) has been drifting down since last year. Specifically, while inflation over a 10 year horizon was still at a level of 1.8 % in December 2013(see green curve), the latest expectations revise this number downward to only 1.5% (see orange curve). These numbers reflect that markets don’t believe in the ECB’s capacities to get close to its target for another 10 years – a worrisome development. On the short end of the curve, expectations signal outright deflation on a 1-year horizon and basically zero inflation on the 2-year horizon.

Source: Datastream ThomsonReuters

Considering all the presented evidence, pressure for the ECB to act is reaching new highs. The great hopes put in TLTRO (if there were any) have been disappointed by very low take up, and the ECB already finds itself stuck in the uncomfortable place of someone who might have tested the resilience of inflation expectations a little too long. So, since it’s evidently not going to be a merry Christmas, let’s hope at least for a happy new year.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF
 

Policy Contribution

Is the COVID-19 crisis an opportunity to boost the euro as a global currency?

The euro never challenged the US dollar, and its international status declined with the euro crisis. Faced with a US administration willing to use its hegemonic currency to extend its domestic policies beyond its borders, Europe is reflecting on how to promote it currency on the global stage to ensure its autonomy. But promoting a more prominent role for the euro is difficult and involves far-reaching changes to the fabric of the monetary union.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 5, 2020
Read article More on this topic
 

Opinion

The Independence of the Central Bank at Risk

The ruling of the German Federal Constitutional Court (GFCC) of May 5 on the ECB’s monetary policy affects not only the relation of Germany to the European Central Bank (ECB) and the Court of Justice of the European Union (ECJ) but also the constitutional foundations of monetary policy.

By: Peter Bofinger, Martin Hellwig, Michael Hüther, Monika Schnitzer, Moritz Schularick and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 2, 2020
Read article Download PDF
 

Policy Contribution

COVID-19’s reality shock for external-funding dependent emerging economies

COVID-19 is by far the biggest challenge policymakers in emerging economies have had to deal with in recent history. Beyond the potentially large negative impact on these countries’ fiscal accounts, and the related solvency issues, worsening conditions for these countries’ external funding are a major challenge.

By: Alicia García-Herrero and Elina Ribakova Topic: Finance & Financial Regulation, Global Economics & Governance Date: May 28, 2020
Read article Download PDF More by this author
 

Policy Contribution

European Parliament

The European Central Bank in the COVID-19 crisis: whatever it takes, within its mandate

To keep the euro-area economy afloat, the European Central Bank has put in place a large number of measures since the beginning of the COVID-19 crisis. This response has triggered fears of a future increase in inflation. However, the ECB's new measures and the resulting increase in the size of its balance sheet, even if it were to be permanent, should not restrict its ability to achieve its price-stability mandate, within its legal obligations.

By: Grégory Claeys Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: May 20, 2020
Read article More on this topic More by this author
 

Opinion

The message in the ruling

The German Constitutional Court's ruling on the ECB's asset purchase programme is open to much criticism but it can hardly be blamed for raising an important question.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 12, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

An analysis of the German Constitutional Court's ruling on the ECB QE programme

The German Constitutional called today on the ECB to justify its bond-buying program. What does today's ruling of the German Constitutional Court mean for the ECB's QE program? Could such a decision open a precedent when it comes to contesting EU law? Today, Giuseppe Porcaro and Guntram Wolff are joined by Franz Mayer, chair of Public Law at the University of Belefield, to analyse the German Constitutional Court's ruling.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 5, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: An analysis of the German Constitutional Court ruling on the ECB QE programme

What does today's ruling of the German Constitutional Court mean for the ECB's Quantitative Easing programmme

Speakers: Franz Mayer, Giuseppe Porcaro and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2020
Read article More on this topic
 

Opinion

Monetisation: do not panic

The extraordinary operations that are under way in most countries in response to the COVID-19 shock have raised fears that large-scale monetisation will result in a major inflation episode. This column argues that so far, there is no evidence that central banks have given up, or are preparing to give up, on their price stability mandate. While there are obviously some reasons to worry, central banks are doing the right thing and the authors see no reason to panic.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: Finance & Financial Regulation Date: April 14, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: The macroeconomic policy response to the COVID-19 crisis

Which macroeconomic policy response is the best option to deal with the crisis currently unfolding and will ensure that the recovery will be as quick as possible?

Speakers: Grégory Claeys, Giuseppe Porcaro, Lucrezia Reichlin and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
Read article Download PDF More on this topic
 

External Publication

Facing the lower bound: what will the ECB do in the next recession?

In responding to the global financial crisis, the ECB has pushed its monetary policy into unchartered territories . Today, it appears increasingly constrained by persistently low interest rates. This paper seeks to understand this challenge and assess whether its toolkit would allow the ECB to weather a European recession.

By: Aliénor Cameron, Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance Date: March 27, 2020
Read article
 

Blog Post

COVID-19 Fiscal response: What are the options for the EU Council?

It is time for the EU Council to make quick progress on the fiscal front and announce something as soon as possible to show that it taken full measure of the severity of the situation.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 26, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Banks and Loan Losses in the Pandemic Turmoil

At this online event we will record an episode of the Sound of Economics, Bruegel's podcast series. In this episode, we discuss the implications of the coronavirus crisis on financial stability and credit availability.

Speakers: Giuseppe Porcaro, Nicolas Véron and Guntram B. Wolff Topic: Finance & Financial Regulation Date: March 25, 2020
Load more posts