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Since 2014, or the threat of negative inflation (falling prices for goods and services) has been a persistent problem for some of the world’s largest developed economies. Euromonitor International forecasts that 16 countries globally (at the time of writing) will register deflation overall in 2015. These include Italy and Spain, the third and fourth largest economies in the eurozone. A further 44 countries worldwide are projected to post inflation rates of less than 1.0% to zero in 2015, including France, Germany, UK and the USA.
The sharp decline in world oil prices (and the consequent fall in energy and petrol prices) since 2014 is a major driver of this trend, while in some countries such as the UK, food price falls have also contributed. A stronger pound and US dollar have made imports cheaper for domestic consumers in the UK and USA, bringing further downward pressure on consumer prices. There has been much scaremongering about the spectre of deflation but in some situations, decreasing prices can be a sign of a competitive economy. Understanding the economic context of deflation is key.
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)
Note: Figures are forecast
There are several circumstances where a drop in prices can be welcome, especially for the consumer:
It is when deflation becomes deep-rooted that the alarms of a deflationary spiral are set off:
A scenario where deflation becomes ugly is dependent on the economic context, as was the case in Japan. Euromonitor expects that Greece will experience a third consecutive year of deflation in 2015 (-1.4%) and the country is also at risk of experiencing a lost decade. Greece is the epicentre of the eurozone sovereign debt crisis, suffered six consecutive years of real GDP decline after the global financial crisis of 2008, and where a quarter of the economically active population are still unemployed in 2015. In this environment, deflation becomes another sign of economic malaise.
The eurozone, on the other hand, is poised to renter inflation territory when a zero inflation rate in April 2015 ended four consecutive months of price declines. Demand and prices in the bloc are being boosted by the Quantitative Easing programme launched by the European Central Bank (ECB) in January 2015, the weak euro and a slight expected rebound in global oil prices. However, Euromonitor International does not expect eurozone inflation to reach the ECB target of below but close to 2.0% until 2018.