In the October economic update video for eZonomics, ING senior economist Bert Colijn explains that despite prices getting cheaper, it appears that few people have stopped buying. He says Europe’s deflation “doesn’t look like actual deflation – and that is a good thing”.
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 happened in Europe?
Colijn says that September 2015 prices were down 0.1% from the year before. The inflation rate has been near zero for all of this year.
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 by October 2015.
“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.”
Colijn says several signs suggest that people are aware the negative inflation is expected to be short-lived, with 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.”