Lowflation in the Eurozone continues (3 graphs)
There has been quite a spat about the Fed not raising the interest rate, which inspired me to look at Eurozone price data: are there any developments which indicate that higher inflation may be just around the corner and a Eurozone rate hike is imminent?
Investigating this I made some interesting as well as ‘pleasant’ discoveries. Here, I argued that central banks should not just look at consumer prices but also at the prices of government consumption, gross fixed investment and assets, for one thing because differential price developments between different price levels might lead to instability. But I only suggested this last development, without proving it. On 15 february on Voxeu, Espen R. Moen, Plamen Nenov, Florian Sniekers however showed that even without interference between different price levels price changes on the most important asset market (houses!) do lead to instability, as lower house prices do not lead to higher demand and lower supply but to the opposite, basically because the ‘risk appetite’ of households plunges. Low and stable consumer price inflation alone will in no way guarantee stable economic development which means that the consumer price mandate of central banks is, ehm, let’s say biased, incomplete and wrong. They have to come up with something more logical. Another pleasant discovery was that Eurostat does not only publishes prices of total gross investment and existing dwellings, but also of new dwellings (part of fixed investment) and calls this ‘house price inflation’.The phrase is not new, but its good that official institutions start to use it – another step away from the ‘wealth illusion’ that increasing house prices make us richer! Eurostat is also explicit about the role of land underlying houses (included in the prices), which underscores that even prices of new dwellings are, to an extent, indicative of asset prices, not of GDP prices. If one thing made a come back in economics after 2008, it’s land! Anyway, what do the data tell us?
- GDP inflation was and is low (graph 1). Adding low wage increases (Q2 2015) and low monthly core and headline inflation to this picture and also looking at national developments within the EU (GDP inflation is low everywhere) there are no signs of increasing price pressure.
- The same holds for prices of new dwellings (partly a GDP production price, partly an asset price, graph 2). Outside the Eurozone there are some countries which show worrying signs, inside the Eurozone – not, except for tiny Estonia and Lithuania (if the 5,7% YoY increase in Germany continues for another 2 years this will be a sign of stress. Now, it isn’t).
- The same holds, a fortiori, for prices of existing houses (graph 3). House price deflation, not inflation, is the problem!