Europe Hit by Deflation as Prices Fall Most in 13 Years

By: Mike_Shedlock

Troubles in Europe continue to mount even as stock markets everywhere are pricing in a strong recovery. Please consider European Prices Fall 0.6%; Jobless at Decade High.

European consumer prices fell by the most in at least 13 years in July after energy costs declined and unemployment rose to the highest in a decade.

Prices in the euro region dropped 0.6 percent from a year earlier, the most since the data were first compiled in 1996, the European Union statistics office in Luxembourg said today. That exceeded the 0.4 percent decrease forecast by economists in a Bloomberg News survey. Unemployment rose to 9.4 percent in June, the highest since 1999, a separate report showed.

More than 3 million people have joined the euro region’s jobless rolls in the last year, and the Organization for Economic Cooperation and Development expects the unemployment rate to reach 12 percent in 2010.

The European Central Bank aims for inflation to be just under 2 percent and ECB President Jean-Claude Trichet has said he anticipates inflation will “temporarily remain negative” before turning positive by year end. While the ECB says medium- to long-term inflation expectations are “firmly anchored,” a European Commission measure of consumer price expectations over the next 12 months fell in July to the lowest since at least 1990, a report showed yesterday.

“The risks on the deflation side are there,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London, which estimates euro-area inflation is the lowest since 1953. “The underlying dynamics do resemble those that you would see in a typical deflationary environment.”

German consumer prices fell in July from a year earlier for the first time in 22 years, data showed this week. Spain and Ireland have experienced annual price declines since March as Tesco Plc and Marks & Spencer Group Plc have reduced prices in their Irish stores.

Unemployment in the euro region increased by 3.17 million people in the year through June and the highest jobless rate was in Spain, at 18.1 percent, according to today’s report. Most Europeans think the worst of the crisis is still to come and a third of workers are “very concerned” about losing their jobs, a survey published on July 24 by the European Commission showed.

Deflation is Not Imminent, it is Here, Now

Falling prices do not constitute deflation. However, they are a likely but not mandatory symptom of it.

In a credit based economy, the key issue is expansion and contraction of credit. Credit is clearly contracting. And credit marked to market (which is what matters most) has dwarfed Central Bank expansion of money supply to counteract it.

Marek Belka, head of the Washington-based IMF’s European department said “We do not see deflation as imminent. But we shouldn’t completely exclude this possibility.”

Belka's statement is silly. Deflation is not imminent, it is right here, right now, by any reasonable measure, and even some unreasonable measures such as falling prices in Europe, Japan, and the US, the likes of which we have not seen since the great depression.

And given we have been in deflation for at least 15 months and possibly much longer (on a credit basis), the debate is not whether deflation arrives. At this point, the only question is how long it lasts.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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