Wednesday, April 30, 2014

Gary Shilling: Deflation fears in Europe

The days of euro strength may be numbered, however, because of mushrooming fears of deflation in Europe. Average house prices in the euro area have dropped 5 percent since the second quarter of 2011. More important, inflation increased a mere 0.5 percent in March from a year earlier. Since January 2013, inflation has been below the ECB’s target of “just under 2.0 percent.” In the 28-country European Union, inflation was just 0.6 percent in March versus a year earlier.

Bankers and policy makers worldwide are deeply worried about trivial inflation in the euro area turning into chronic deflation. Christine Lagarde, the chairman of the International Monetary Fund, said in a January speech: “We see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.”

This month, Olivier Blanchard, the IMF chief economist, said deflation “would make the adjustment both at the euro level, and even more so for the countries in the periphery, very difficult. We think that everything should be done to try to avoid it.”