Article / 15 October 2014 at 8:52 GMT

Daily Shot: Lead us not into deflation Team / Saxo Bank
  • Eurozone industrial output contracting
  • Italy facing outright deflation
  • UK inflation levels hit five-year lows

By Walter Kurtz

We start once again in the Eurozone, where German economic sentiment continues to fall considerably faster than economists had hoped. This is going way beyond the Russian sanctions' impact.

Source: ZEW

Moreover, the euro area’s industrial production contracted faster than expected. I am still hopeful we will see some stabilization, but at this pace we could soon be looking at another recession in the Eurozone.

Industrial Production
Source: Eurostat


Now I’d like to focus a bit on declining inflation around the world, with a particular focus on the UK.

Italy is dealing with outright deflation as the economy contracts.   

Italian CPI
Source: Istat

But the Eurozone is not the only economy with disinflationary pressures. China's latest Consumer Price Index print, for example, came in below that of the US (1.6% vs. 1.7%) — something we haven't seen until recently.

China CPI

The UK is also facing falling inflation. Prices continue to fall at the wholesale level, with British firms still having little pricing power. It's difficult to raise prices when everything is marked down across the Channel. 

For the UK's consumers, inflation is now at the lowest level since the Great Recession — for both the headline and the core CPI.



It's difficult to see how the Bank of England can begin raising rates in such an environment, even with the housing market remaining strong. With oil prices collapsing, inflation is only going to move lower. Just as the case with the Federal Reserve, the forward rates markets are pricing in an increasing delay in liftoff. The BoE is on hold at least until next summer as disinflation spreads to the UK.

Markets' expectation of the UK overnight rate
Source: Bank of England


In the US, the long bond yield is now below 3%. Amazing.

US 30Y Yield Source:


On the commodities front (outside of the crude oil hysteria), weather-related delays in corn harvesting (lots of rain in the Midwest) forced some speculative shorts to cover. Futures were up 3% late in the day.

US Corn


Now some food for thought. In the US, men with kids get a bump in salary. Women? Not so much.

Median personal income by parenthood and sex

 Source: Wall Street Journal, City University of New York

-- Edited by Michael McKenna

* Walter Kurtz is an alias

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