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Eurozone Prices Deflationary for the Second Month, Euro Rises

Posted by Joseph Trevisani on Mar 31, 2016 6:19:24 PM

Eurozone consumer prices stayed in outright decline in March, only the second time since the financial crash that the index has fallen in  consecutive months.

Core inflation recovered slightly but remained at just half the European Central Bank's goal 2 percent goal where it has been for 29 of the last 30 months.

The consumer price index for the 19 nation currency union slipped 0.1 percent over the past twelve months, matching forecasts, and following February’s 0.2 percent decline, according to Eurostat the European Union statistical agency.  

Core inflation which removes food and energy costs, rose to 1 percent in March, from 0.8 percent the prior month. 

The last time European prices slumped into deflation, from December 2014 through March 2015, the ECB launched its sovereign debt purchase program.

In March 2015 the central bank committed to buying 1 trillion in euro assets in an attempt to stabilize inflation and promote economic growth. This quantitative easing program had modest success in returning positive acceleration to prices.  For the next ten months headline CPI averaged 0.15 percent, with only one month, September with a negative print. 

The current two month bout of deflation most likely pushed the ECB to its latest reflation effort. The bank will begin increased securities purchases on Friday, expanded to 80 billion euros ($91 billion) a month from 60 billion and widened to include some types of corporate debt.  

These measures, along with deeper negative interest rates, were announced by president Mario Draghi at the March 10 meeting and are designed to spur economic growth and counter deflation even if they are unlikely to return inflation to the bank’s 2 percent goal.

Since that meeting the euro has gained 3.4 percent against the U.S Dollar and 2.7 percent versus the yen despite the new liquidity from the ECB.

The main blow against the dollar took place a week later at the March 16th FOMC meeting when the Fed cut in half its rate forecast for 2016, reducing the anticipated number of increases from 4 to 2.  

Eurozone inflation has not been at the ECB's goal of just under 2 percent since January 2013. The ECB targets headline CPI, including food and energy prices. The sharp decline in crude oil prices since the summer of 2014 have dragged down inflation rates around the globe. 

The euro-wide inflation numbers mirror the low readings in the EMU's largest economies.

In Germany, the EMU uniform harmonized annual inflation rate rose to 0.1 percent in March from minus 0.2 percent, according to information issued Wednesday. The rate in France was minus 0.1 percent, while Spanish prices fell 1 percent from the prior year. Italian prices slipped at a 0.3 percent yearly rate, just shy of the post-recession low of -0.5 percent in January 2015. 

Economic growth in the Eurozone has improved only marginally since the end of its last recession in March 2013.

Quarter to quarter GDP expansion averaged 0.18 percent in 2013, including the recessionary first quarter. This improved to 0.25 percent in 2014 and 0.4 percent last year. This compares to the 0.54 percent quarterly average in the five years 2008. 

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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