Tuesday, November 11, 2014

Mike Bird — Why Europe Might Have Already Spiraled Into Deflation

Former Bank of England economist Tony Yates, who's now a researcher at the University of Bristol, thinks the eurozone might have already fallen into deflation.
He has previously blogged on the evidence that inflation is systematically overestimated by statistical authorities.

A range of different studies that Yates mentions suggest inflation is repeatedly exaggerated upwards, especially in Europe. Mark Wynne at the Dallas Fed estimated in 2005 that there could be "an upward bias of between 1.0 and 1.5 percentage points per annum on average".
That might not sound like a lot, but with inflation currently at just 0.4% in the eurozone, even a small downward adjustment would put the currency union in deflation, with prices actually falling. A 1.5 percentage point shift would put the true rate at -1.1%, and mean the continent dropped into negative territory way back in summer 2013.

This all sounds a bit terrifying: the four big central banks in advanced economies all target 2% inflation, so investors interpret a big difference between say, 3% and 1.5% inflation. But a lot of economists think that difference could just be down to statistical measurement problems.
Business Insider
Why Europe Might Have Already Spiraled Into Deflation
Mike Bird

1 comment:

Ignacio said...

Spain has been on deflation since 6 years ago. Only thing that has really varied (up and down) are energy prices and maybe some food, everything else just falling in prices or at best stagnant. OFC wages are deflating like crazy because new jobs pay less and ther eis a lot of underemployment around (a lot of forced freelancer and temporal jobs). In the end most of the population is losing purchasing power though because incomes are falling faster than prices (with Japan joining the team of deflation + net importer/devalued currency they must be experiencing a similar situation right now).

And if housing and rents (the majority of family expenses) was taken into account how it should, deep deflation. But ofc that's double-sided because it does not translate to past mortgages, so the harm comes from both directions: falling prices + not falling mortgages.

Awful, don't get fooled most of the periphery has been in a deep depression. The only thing holding up the social fabric in 'the periphery' of Europe are: a) different family structure from northern Europe or typical anglo-saxon cultures, this means inter-generational transfers and eroding the past accumulated wealth to keep up (ofc eventually you run out of reserves); b) seasonal income relief from exports (tourisms), but with the world sinking fast into a new recession this is going to stop fast.

Looking bad.