This key index just dipped below zero for the second time this year
Inflation has been a far bigger worry for most people than deflation. However, in Britain and Europe as a whole, several signs point in the direction of deflation.
Our August Global Market Perspective explains with the help of six revealing charts:
Because inflation has dominated the economic landscape for so long, virtually everyone from governments and corporations to academic institutions and individuals unwittingly adapt their affairs to account for perpetually rising prices. Britain’s incoming deputy prime minister is no exception. In July, Angela Rayner announced a package of workers’ rights reforms that will “consider inflation and the cost of living when setting the national minimum wage.” What happens when deflation becomes an economic reality? The plunging components of the UK Consumer Price Index argue that we may soon find out. Shown on the top left (below), the index that tracks air transport just dipped below zero for the second time this year, while the index that tracks electricity, gas and fuel prices has been contracting since the fourth quarter of 2023. The subindex tracking new car prices has plummeted from more than 7% in 2022 to about 2% today.
Across Europe, where the economy underwent brief bouts of deflation in the 2010s, broader price indexes are signaling deflation, as the charts in the second row show. Durable goods, for example, which include things like appliances, electronics, furniture and power tools, rose at just 0.5% last month, a new pre-pandemic low. Core inflation, which strips out food and energy prices from the broader CPI, sits at 2.9%, year over year, down from 5.7% in March 2023. Supercore inflation, which also subtracts housing costs, has fallen from 6.3% to 2.9%. Cynics say that the core and supercore numbers fail to reflect reality, since they omit the very prices that are often rising most precipitously. We’ll remain neutral on that subject, but patterns are patterns, and any index that remains consistent over time can serve as a basis for forecasting. The inflationary peaks that arrived in 2022 and 2023 were remarkably uniform. The subsequent crashes suggest that the impending deflation will not be mild.
Deflation is one of the least-understood economic environments for investors, yet one of the most potentially devastating to the unprepared. Our monthly Global Market Perspective will keep you up to date on the trend. Follow the link to learn more.