Europe and US still at risk from deflation trap

The developed world has not shaken off the risk of sliding into a deflation trap, experts warned after new figures showed that prices in both the eurozone and the US are falling.

By Edmund Conway, Economics Editor
Published: 5:54PM BST 14 Aug 2009



President Barack Obama's 'cash-for-clunkers' car incentive scheme is thought to have helped the manufacturing sector Photo: EPA

Consumer prices in America slipped by 2.1pc in the year to July, according to official data released yesterday. It coincided with Eurostat figures showing that the eurozone's consumer price index dropped by 0.7pc in the past year, compared with deflation of 0.1pc in June.

The figures underline concerns that despite the sharp rebound in a variety of economic indicators, and despite news that France and Germany have both now pulled out of recession, the threat posed by deflation has not yet been extinguished. Indeed, the fall in consumer prices over the past year in the US represents the biggest such drop since January 1950, and means that the country has now been in deflation for eight months.

Gabriel Stein, of Lombard Street Research, said: "Ultimately, US consumer prices will not rise on a sustained basis until the negative output gap has closed and a positive output gap opened instead. At some stage, this will happen. But not for some time."

The price figures, which showed that despite the annual fall prices were flat on the month, coincided with data showing that US consumers' confidence has slid yet further amid worries about the state of the jobs market and wages.

The University of Michigan consumer sentiment barometer dropped from 66 points to 63.2 this month – the lowest since March, from 66 in July. The measure reached a three-decade low of 55.3 in November. The Labor Department said its consumer price index was unchanged from June as forecast, and dropped by 2.1pc – the most in six decades – from July 2008. Economists had expected the index to rise to around 69.

Chris Rupkey, of Bank of Tokyo-Mitsubishi UFJ, said: "If consumers are lacking confidence, then they will not be able to help us spend our way out of this long, dark recession. Households are still concerned about the jobs outlook, and certainly, Fed policy is also gearing off of the labour markets as no Fed has lifted interest rates while the unemployment rate is rising."

However, there was brighter news from the manufacturing sector, as separate figures showed that industrial production rose for the first time in nine months. Output rose by 0.5pc last month, following a 0.4pc fall in June. The White House's so-called "cash-for-clunkers" incentive scheme to encourage homeowners to replace their old cars with new models is also thought to have helped.

http://www.telegraph.co.uk/finance/news ... -trap.html