LONDON (MarketWatch) — It’s happened. After inching towards the dreaded 0% inflation threshold for months, data out on Wednesday finally confirmed the worst fears about the economic health of the eurozone — the region has slipped into deflation.
Or has it? While the 0.2% annual drop in consumer prices in December qualifies as deflation by the most common definition, the European Central Bank is more stringent in its parameters.
In 2009, when the consumer-price index was last below zero, then-member of the ECB’s Executive Board Lorenzo Bini Smaghi described deflation as “persistent” price declines that last for an “extended period of time, say at least a year”. And in January a year ago, ECB President Mario Draghi echoed that view when he stressed “we define deflation as a broad-based, self-fulfilling, self-feeding fall in prices,” speaking at his monthly press conference.
By that ECB definition, today’s number is merely negative inflation with deflationary pressure, according to James Ashley, chief European economist at RBC Capital Markets.
“For a single month of negative inflation, they’d say ‘bad news, but it’s not deflation’. In order for it to be deflation, it would have to be across a whole range of countries and a whole range of products, not just about oil prices,” he said. “Therefore, if you’re defining deflation from the ECB guidelines, negative headline inflation is a necessary, but not sufficient condition.”
However, it appears the wider analyst corps in Europe didn’t read that ECB memo. Many economists shot off notes talking about the new “deflation” scenario in the eurozone after the lackluster reading from Eurostat was released.
What’s not in doubt is that falling consumer prices have added to the pressure (yes, that is possible) on the ECB to launch quantitative easing at its Jan. 22 meeting. The possibility of that stimulus helped send European stock markets sharply higher and the euro
lower in Wednesday’s trade.
But maybe the issue isn’t really whether the eurozone is officially in the deflation zone, Holger Schmieding, chief economist at Berenberg, pointed out.
“The real question is whether we see something we should worry about, or whether this is just a gift from heaven — low oil prices — which we should celebrate. So far, it is a lot of the latter and very little of the former.”