Deflation accelerates in eurozone and Japan

Author: By Sean O’Grady

In Europe the deepening trend of deflation surprised analysts. Having dipped into negative territory for the first time in the single currency’s history in June with a 0.1 per cent annual decline, the 0.6 per cent drop in June exceeded expectations. The acceleration in Japanese deflation was anticipated. The authorities there said that prices in the Tokyo region (released before national data) fell by 1.7 per cent on the year to June, up from 1.1 per cent in May.

Lower world commodity prices and the relative strength of the euro and the yen have played a part in these movements, but the fundamental factor remains the global contraction in trade and demand as a result of the financial crisis.

The downturn continues to affect the labour market. Unemployment in the 16 EU states using the euro rose to hit 9.4 per cent in June, the highest in a decade. The number out of work climbed by 158,000 during the month, taking the total jobless figure for the currency area to 14.9 million. Among the largest economies, Spain stands out as being particularly bad ? a rate of 18.1 per cent.

Central banks and governments around the world have factored such trends into their calculations ? hence their attempts to “print money” to induce inflation ? and a principal concern remains that this relatively benign trend does not develop into a more pernicious type of deflation, with perpetually falling prices, property and share values and a depressed economy.

The Bank of England’s Monetary Policy Committee meets again next week, having completed its initial £125bn injection of money into the economy. British CPI inflation is yet to drop into negative territory, though the older RPI measure, taking into account the drop in mortgage bills, has been negative since May.

A Reuters poll last week showed that economists are divided on whether the Bank will decide to extend its programme of “quantitative easing”.

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