2nd October, 2020
Frankfurt, we have a problem...
The euro zone recorded its second straight month of headline consumer price deflation in September, with 'core' inflation excluding energy and unprocessed food prices unexpectedly falling to a new record low of just 0.4%. What's more, European Central Bank Vice President De Guindos says headline inflation will likely remain negative for the rest of the year. While inflation signals everywhere have been sideswiped by this year's pandemic shock and lockdowns and related data and survey problems, the prospect of prolonged deflation alongside an explosion of government and private debt is a huge potential headache for a central bank that already has negative policy interest rates and is at full tilt in bond buying across the spectrum. It may also force it act tougher to prevent any rise in the euro exchange rate exaggerating the price picture further. Deeply negative inflation readings already mean that sub-zero-nominal borrowing rates are rising and almost positive again in real or inflation-adjusted terms.
Chart by Ritvik Carvalho and commentary by Mike Dolan
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