When is deflation not really deflation?

22 October 2015 ... min read Listen

Inflation in the eurozone is negative again. So is it worth putting off buying goods or services?

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In this economic update, ING senior economist Bert Colijn explains how despite prices getting cheaper, it appears few people are putting off buying. He says Europe’s deflation “doesn’t look like actual deflation – and that is a good thing”.

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A dip into negative territory

When prices fall, it might feel like there are “good deals” to be had. But deflation is also a symptom of slow growth in the economy. Even worse, slow growth can spiral if shoppers start delaying purchases. Japan has seen this type of problem since the 1990s.

So what has happened in Europe? Colijn says that in September 2015, prices declined by -0.1 percent compared to the year before. The inflation rate has been close to zero for all of this year.

The “oil effect” set to wear off

Colijn highlights the oil price as the big factor. It fell from over $100 a barrel last year to around $50 now. “Fuel, electricity and gas are cheaper. And other prices are rising more slowly than usual because of the weak economic environment,” he says. “A reason Europe’s deflation doesn’t look like actual deflation is that prices are likely to rise again when the oil effect wears off.”

Coljin says several signs suggest that people are aware the negative inflation is expected to be short lived, with both increases in household consumption and the measure of consumer intentions to make a major purchase in the next year hitting a 12-year high. “With that, consumers are not just getting what they want, they are also doing their bit for the economy.”

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