Eurozone Inflation: diverging trends3 February, 2011, 16:42. Posted by Zarathustra
Tags: deflation, Europe, European Central Bank, Eurozone, Inflation, Jean-Claude Trichet
From what has been said by Jean-Claude Trichet, the president of the European Central Bank, people now believe that the ECB may soon be raising interest rate. The latest figure did show that Eurozone inflation as a whole is on the rise, with the flash estimate for January now at 2.4%.
Source: National Bureau of Statistics (China), St. Louis Fed (United States), Office for National Statistics (United Kingdom), European Central Bank, Eurostat (Eurozone), Statistics Bureau (Japan), Ministry of Commerce and Industry (India)
You can always dig deeper than the headline numbers though. When you look at the numbers carefully, there’s a worrying sign. The chart below illustrates the huge divergence in the inflation trends across major countries in Europe. While the range of inflations across countries looked relatively narrow before the financial crisis, we are seeing some big differences after the crisis.
(Yes, I am rather obsessed with plotting charts of inflations)
The two which stand out here were Greece, with high inflation, and Ireland, which is still in deflation. Greece is a surprise to me as the debt crisis and austerity hit the country. Eurostat forecasts showed that Greece economy would have contracted 4.2% in real term in 2010, so the prospect of having economic contraction with an oddly high inflation (at 5.2% in December 2010) is extremely worrying. On the other side, we have Ireland, which the latest available figure shows that the country is still in a deflation. This one is, of course, not too surprising. With their economy contracting 0.2% in real term according to Eurostat forecast, having an inflation would be more terrifying than having a deflation. Finally, despite the strength of German economy, inflation was only at 1.9% in December 2010, which was hardly an alarming figure.
Having a monetary union in Europe served the region well before the crisis, but it looks like it is not the case now. The situation now is giving the European Central Bank a hard time as to what to do. With Greece, which looks like the United Kingdom now, is having a stagflation, both monetary easing and tightening seem to be undesirable. On the other side, we have Ireland, which seems to require more of monetary easing. For the rest of the Europe though, it seems that a wait-and-see mode is a more proper thing to do.
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