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%

Publishing date
19 December 2014

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.


About the authors

  • Silvia Merler

    Silvia Merler, an Italian citizen, is the Head of ESG and Policy Research at Algebris Investments.

    She joined Bruegel as Affiliate fellow at Bruegel in August 2013. Her main research interests include international macro and financial economics, central banking and EU institutions and policy making.

    Before joining Bruegel, she worked as Economic Analyst in DG Economic and Financial Affairs of the European Commission (ECFIN). There she focused on macro-financial stability as well as financial assistance and stability mechanisms, in particular on the European Stability Mechanism (ESM), providing supportive analysis for the policy negotiations.


  • Pia Hüttl

    Pia Hüttl is an Austrian citizen and joined Bruegel as an Affiliate Fellow in 2015. Her research interests include macroeconomics, financial economics and monetary policy as well as European political economy.

    Prior to this, Pia worked as Research Assistant for Bruegel, and as a Trainee in the Monetary Policy Division of the European Central Bank. Also, she worked as a Blue Book Stagiaire in the Monetary policy, Exchange rate policy of the euro area, ERM II and Euro adoption Unit in DG Ecfin of the European Commission.

    She holds a Bachelor's degree in European Economics and a Master's degree in International Economics from the University of Rome Tor Vergata. She also obtained a Master's degree in European Political Economy from the London School of Economics, with a thesis on Current Account imbalances in the Euro area and the role of financial integration.

    Pia is currently pursuing a PhD in Economics at the Humboldt University in Berlin.

    She is fluent in German, Italian and English, and has good notions of French.

    Declaration of interests 2015

    Declaration of interests 2016

    Declaration of interests 2017

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