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ECB Meets To Tackle Deflation While Ignoring Shrinkflation
ECB Meets in Frankfurt
As the Governing Council of the European Central Bank (ECB) convenes today in Frankfurt for its monthly policy meeting, markets are focusing on how the ECB will signal the initiation of its quantitative easing (QE) programme which is aimed at countering deflationary forces in the Eurozone.
In August, the annual inflation rate in the Eurozone hit a precariously low rate of 0.3% per annum. This is far below the ECB’s target rate of 2% and also far below the average rate of inflation in the Euro area over the period 1991-2014, which was 2.18%.
Financial markets are already pricing in an ECB round of QE after ECB president Mario Draghi signalled such a move last month at the Jackson Hole central banker conference in the US, where he stated that the ECB would use ‘all available instruments’ to counter deflation.
European sovereign bond yields have fallen since Draghi’s August comments and the Euro has weakened against the US dollar. It is assumed that European QE would be in the form of a bond buying programme, much like the US and UK versions of QE that have already been implemented.
The ECB is already providing cheap liquidity to commercial banks in Europe though long-term refinancing operations, and since this is not providing the necessary stimulus to boost the Eurozone inflation rate, markets will be hanging on every word of Draghi’s speech today in Frankfurt so as to attempt to predict the exact timing of the commencement of the ECB’s quantitative easing programme.
While there is plenty of evidence that governments aim to minimise headline inflation figures for political reasons, financial markets still tend to fixate on these headline figures. Financial markets also get very concerned about deflation.
Deflation causes sovereign and corporate debt repayment costs to rise, and also causes economic contraction and unemployment since consumers delay purchases expecting prices to be cheaper in the future. It is these lowly inflationary expectations (deflationary expectations) that Draghi and the ECB are worried about.
An ECB QE programme is not surprising given that the ECB’s official mandate is price stability, not just on the upside of prices but also on the downside. While many will be cynical to the fact that there is no price stability, and that the inflation rate can’t be this low, the ECB’s figures, however derived, point to this trend.
In the Eurozone, the inflation rate is calculated using a weighted average of a consumer price index where food, alcohol and tobacco count for 19%, services 41%, energy 11%, non-energy industrial goods 29%. Strip out the components of food, alcohol, tobacco and also energy, and you get something called the core inflation rate which is currently running at 0.9% for the Eurozone, up from 0.8% in July.
Shrinkflation Becoming More Obvious
This core rate of inflation however does not provide much solace to consumers who, on a daily basis, are experiencing what has become known as stealth inflation or ‘shrinkflation’.
In a recently published book, Dr. Philippa Malmgren re-highlights this ‘shrinkflation’ trend. Malmgrem is a former financial market advisor to the White House, and a former member of the US Working Group on Financial Markets, which is more commonly known as the Plunge Protection Team.
According to Malmgren, ‘Shrinkflation’ refers to the concept where companies reduce the weight or size of an item without increasing its price. In this way a company can increase its operating margin and profitability by cutting costs while maintaining the same sales volume.
Consumer goods examples include chocolate bars that are smaller, smaller breakfast cereal boxes and slimmer canned goods such as tuna. It also happens in the services industry such as hidden charges in airline travel and hotel accommodation costs.
Consumers are known to react more to price changes than product changes, hence as a first step to maintaining profitability during an economic downturn, companies try to make changes that they think consumers won’t notice. This trend is cyclical and has happened in all major economic downturns such as the late 1980s and mid 1970s.
Corporates will use various misleading strategies to deflect attention away from the shrinkage. These include less is more, less is healthier, the packaging is smaller because it is greener for the environment, or sometimes, the packaging is an innovative breakthrough in packaging design.
Other corporate spins include, the packaging costs more due to higher oil prices, and since oil is used to make our packaging, our packets have to be smaller. Interestingly, companies do not do this with clothes or electrical goods, only because they can’t obviously shrink them.
Consumer watch groups such as Which? And Consumerist have been wise to this camouflaged inflation trend for some years now, but it’s becoming so prevalent that it is now hard for the average consumer not to notice.
Companies cut costs until even the average consumer begins to notice, after which the company is forced to raise end user prices. And this stealth inflation that is currently occurring in the background will surface in the near future in the form of higher high street / main street prices.
As ‘shrinkflation’ becomes no longer viable, it will soon reveal itself in the form of higher consumer prices. And with central banks around the world creating inflation as a policy measure so as to inflate away the world’s massive debt pile, the question remains as to whether the central banks will be able to control this deliberately induced inflation in an environment where ‘shrinkflation’ no longer works.
The coming inflationary shock is unpredictable, but once ‘shrinkflation’ turns to open price inflation, then it may be too late to insulate financial assets and portfolios. Gold has always acted as a hedge against inflation. That is one of its main properties. That is also why gold should be part of a prudent investment portfolio in the coming high inflationary environment.
MARKET UPDATE
Today’s AM fix was USD 1,271.00, EUR 966.69 and GBP 772.36 per ounce.
Yesterday’s AM fix was USD 1,268.50, EUR 965.67 and GBP 769.39 per ounce.
Gold climbed $4.80 or 0.38% to $1,270.00 per ounce and silver rose $0.06 or 0.31% to $19.22 per ounce yesterday.
Overnight in Asian trading gold recovered and traded back up to close at $1,270.10 in Singapore. Further gains were seen in London where prices rose to $1272/oz before consolidating. Silver traded at the top end of the $19.10 - $19.20 range, before breaching $19.20. Platinum edged up to $1412, from $1408 yesterday but touched $1,420 earlier today.
Palladium reached $884, and was up 1.15% from yesterday’s $874. Palladium has seen some profit taking but is still in an uptrend since the beginning of the year. The recent supply deficit induced strength in palladium, and its new multi-year high earlier this week are creating additional interest from momentum traders and precious metals investors.
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GC... The ability for most to 'insulate assets' has long since past. We are in a game of musical chairs, with a thousand people vying for each chair.
It wasn't long ago you were claiming that September would be a great month for metals, as it traditionally has been, and I responded with the comment that the central bank was the only game in town. We will play this game of musical chairs until such time as the music stops, read the coming collapse, at which point most will be found without a place to sit.
And while I agree that metals are one of the places to be, it is not for the purpose of investment, but rather survival, assuming that survival is a possibility. We have a war coming ahead of collapse, and as usual the financial class believes that it can control the war and it is never right.
The good news... this may in fact be the war to end all other wars.
There may be a reason you have almost no readership...
There's a mountain of evidence to show QE does absolutely nothing except allow Banks to live on life-support. It's clear as day that Central Banking is a tremendously flawed institution...they appear to have no benefit for the wider economy, and are just another Banking Scam, it's State-sponsored Theft, and now everybody knows that Western Financial architecture is just a kleptocracy. and the concommitent legal system is just a joke. Zeitgeist...the longer (Europe) waits to solve the thieving nature of Banks, the more government institutions are going to come crashing down, until western populations will be begging Muslim Barbarians to come and rule over them! The maths on this is not going to change, the circle is squared, Banking is no longer about the accumulation and deployment of Resources - that's done -ten Golden years swalllowed by Greed and incompetence - crowned by building a wall out of concrete - Banking is now about Democracy; the government's debt is now to be owned by the general Public rather than a handful of Barons, or Princes. Policy-makers may remain as argumentative as they wish, try as they might with as many ideas as they might have, there simply is no other way. Even a War works against these Kleptocratists interests: there is no better cover to confiscate and appropriate the wealth of Billionaires. ...I need general anaesthetic for this.
It appears the central banks of the world have made the crux of their existence a balancing act. You can almost imagine these bankers standing atop a fence. On one side lays a field of inflation and on the other a deep pit of deflation.
A new round of easing by central banks to combat a slowdown in growth may again be in the cards but do not be surprised if this time it is less successful. The magic of this policy is losing its luster. More below on why this is not working.
http://brucewilds.blogspot.com/2013/11/central-banks-try-to-balance-on-f...
We might be at 'peak shrinkage' for many things, especially chocolate bars. I was waiting to pay for fuel the other day and picked up a Mars bar, it was so small compared to the past that I cannot see how they can shrink it anymore. If they do, then it's 2 bites, that's it so who's going to buy that for the price they want? Some will, but not many I would think.
if you like chocolate/crisps that sort of thing the only place to buy now, without getting ripped off, is in the Pound shops. Still plenty of good deals there but even they are into shrinkage.
I have come to the conclusion that while inflation appears tame and government claims it is low it is growing. The seeds have been planted, and the number of them is somewhat shocking. Inflation lurks beneath the surface and is hidden away in the dark corners of our future.
Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. More on this subject in the article below.
http://brucewilds.blogspot.com/2013/06/inflation-lurks-beneath-and-hidde...
What happened to letting banks fail?
When deflation results from an increase in productivity, which would be the case today, the average standard of living increases by leaps and bounds. Nominal GDP might fall but real per capita GDP would increase. It is true that an isolated number of billionaires might suffer.
Common Sense Economics http://quillian.net/blog/
Deflation is Goooooooodddddd!! Inflation is Baaaaaadddd!
Neither a borrower nor a lender be!
If people, banks or corporations borrow more than they can service in any environment then they should be penalized, potentially with the figuative death penalty.
People are never there when you need them!!!
http://www.baader-meinhof.com/tag/frankfurt-am-main/
Core inflation = inflation for stuff you don't need and can get by with not having it.
There are other aspects of the game that maybe/apparently a gold-flacking blog isn't aware of.
The game can continue far beyond the package shrinking stage with other methods being used. The principle reason the companies do these things is to avoid the inevitable "price shock" of inflation and nominal rising costs, which must be passed on as rising prices or the mfg goes broke.
Shrinking package size is only one of the ways to do raise prices without raising prices. Maintaining package SIZE while decreasing package CONTENT is usually the first step. (10 burritos become 8 burritos with opaque packaging and the number and size of the burritos moves from the front of the pkg to the end... where the packaging is crimped.) a variant of this is shrinking product size and maintaining product count.
Hershey's reduced the "fun bar" package (10 bars @) by making the fun bars smaller - then they took them off the market all together since almost everyone can count to ten. (There were ten per pkg) The next step was to shrink the size of he individual bars AND re-introduce the "fun bars" in a different sized package - ie like 14 bars per of the reduced size bar, and raise the price of the package. How may people will stand there and figure the price per ounce and compare it to the old 10 bar size? And then eventually they reduce the package back to ten - only they are now smaller bars and they cost more.
In my prowling of grocery store aisles, I'd occasionally ask a customer about the cost of their purchases. Most don't even look at the prices or the quantities they are getting. "Fool me once, shame on you. Fool me twice, "Oh look! It's on sale!")
:-(
Coffee sellers were in a bind - they have a can that's a standard size - but people would bitch if the can was only half full. (It's all about visual perception). So the coffee cans shrank by about a third. People didn't notice the product shrinkage as much as because the larger cans were never full anyway, and the cans were now mostly full. So, since I wasn't tracking coffee (on my personal inflation" market basket") they probably shrank the package and the amount of product at the same time, and as you noted, maintained the price.
I see contracts in the commodity sector getting re-negotiated or broken. This is real danger. Trade is the is the only thing that matters, period. When the world stops trading, we will start killing each other. History is very clear on this.
And by "trade" I am talking about real goods and services, not financial "products" of mass destruction.
Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.
The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.
http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit...
Shrinkflation British Airways style:
Introduce Fuel surcharges when using mileage points on purchasing a flight.
Sure you can get a business class seat for a flight from Seattle to London for 60K miles each way, just like you could a few years ago. Only now you will have to pay quite close to the price of an economy flight in addition to the 120K points.
About 1300 $ Shrinkflation....
And don't even get me started on the increasing the number of seats and shrinking the space for each seat...., much less charging me for a seat assignment, substandard food and decreased access to flight attendants...
Bullshit.
1) When was the last time Goldcore delayed buying a laptop or cellphone because he knew the prices would be cheaper in 1 year?
2) Draghi is worried because deflation causes government to shrink. Less wealth to invisibly skim from the people.
If GC is drinking the coolaid then I have some serious concerns conducting business with GC.
I always wait till I cannot stand my TV any longer, because I know the product always reduces in price and increases in functionality.
There's an awful waft of stink-flation coming out of the NY Fed gold vault. Smells like horse manure...
German gold in NY storage :
Shrinkflation at its most Schrechlich !
I really think he meant Stinkflation.
Gold demand in Europe, especially in Germany is going to go through the roof! Draghi is producing a European version of the Lira. Chewing gum money for everyone. I've lived through it. Have seen the bills and exchanged Deutschmark for Lira. The Lira depreciated almost on a daily basis during that time.
This is the Italian way of dealing with debt problems and now Germany is caught in this downdraft. The currency is going to be worthless. To all the German members of ZH out there I can only urge them to convert, convert, convert all and every Euro they're holding into gold or silver.
The Germans will be wiped out financially - again
This is the BIG reaping! The US rebuilt Germany after the war and is now collecting the payments!!!! There won't be anything left when the parasites are done with the host!
Get out of your Euro holdings now!
Hard to imagine not long ago Greek yields were at 30%!
Now what? Besides "unemployment at 30%" not much?
"The Red Army takes Berlin"?
Sorry but Germany isn't going to have an inflation problem anytime soon. They could ask for Konigsberg back now that Russia has their Crimea...
All it takes is a spark to ignite the fire. Draghi is playing with matches in hay loft during the middle of summer.
Eventually the doors will break and then there's no way to get the horses back into the barn.
Draghi wants to inflate the debts away. It just takes longer for the cash crowd to understand their predicament. Germans are not used to being in this position but the older ones remember Weimar. The young ones just think their money is as tough as Krupp steel. Not anymore!