Earlier this month, when we previewed the September ECB meeting and subsequent Draghi presser, we noted that the “the deflationary boogeyman still lurks” in Europe and as Richard Breslow wrote that morning, “the five year/five year inflation gauge that Draghi has said the ECB watches very carefully remains at very depressed levels [with] no sign from the swaps market that inflation is expected to hit target as far as the eye can see.”
Breslow continued, “say what you will about the market being wrong, but the market has had a better track record on predictions than many central bankers.”
Well, sure enough, on Wednesday we learned that less than a week after the Krugman “success” story that is Japan stumbled back into deflation...
...inflation has officially turned negative (again) in Europe where consensus hopes for an unchanged print were once again disappointed when the September CPI print came in negative on the back of a drop in commodity prices, confirming the latest inflationary impulse from the March launch of QE is officially over.
The message being sent here is fairly straightforward, but for what it's worth, here's a bit of color from Bloomberg:
The euro area’s inflation rate unexpectedly turned negative in September for the first time in six months, adding pressure on the European Central Bank to bolster stimulus.
Consumer prices in the 19-nation currency bloc fell 0.1 percent from a year earlier, according to a preliminary report published by the European Union’s statistics office in Luxembourg on Wednesday. Economists predicted an inflation rate of zero, according to the median estimate of 38 analysts in a Bloomberg survey. Unemployment in the region remained unchanged in August at 11 percent, Eurostat said in a separate release.
Data “was broadly driven by the energy component,” said Giada Giani, an economist at Citigroup Inc. in London. “There are very little inflationary pressures even aside from the oil-price shock. It should be bottom for the year.”
Brent oil has plunged by a quarter since the end of June amid speculation a global glut will be prolonged. Oil is poised for its lowest quarterly average price since the start of 2009.
Energy prices fell 8.9 percent in September from the previous year, Eurostat said. Core inflation, which strips out volatile elements such as food and energy, remained unchanged at 0.9 percent.
The setback comes as the euro area’s recovery shows signs of strengthening. Economic confidence unexpectedly increased in September to the highest in more than four years as sentiment in the industrial and services sectors improved. A gauge of economic activity points to a 0.4 percent rate of expansion in the third quarter amid rising orders and backlogs of work.
Even so, unemployment is only falling slowly from the 12.1 percent peak reached in 2013. The region’s jobless rate fell less than initially reported in July and remained unchanged in August, according to Eurostat’s report.
Wages will only increase at a moderate pace amid weak growth and a gradual decline in unemployment, said Michael Schubert, an economist at Commerzbank AG in Frankfurt. That argues against noticeably stronger underlying price pressure.
In other words, the promise of €1.1 trillion in asset purchases (i.e. money printing) has not only failed to engineer a robust recovery complete with the promised dramatic declines in unemployment and/or dramatic increases in wages, it hasn't even managed to keep Europe out of deflation. The most hilariously absurd thing about it all is that it is indeed unconventional monetary policy that has helped to keep otherwise bankrupt US drillers in business thus perpetuating the very same low crude prices that everyone now blames for the disinflationary impulse.
Of course these are post-crisis central bankers we're talking about here, which menas that when a lot of Keynesian cowbell doesn't work, the only cure for the deflationary fever must be more Keynesian cowbell which explains why Japan is about to double down on Abenomics (from JPM: economist Masaaki Kanno says in report that Bank of Japan will announce additional easing on Oct. 30), and why the ECB will almost invariably expand PSPP. Indeed, S&P is now out calling for ECB Q€ to last for nearly two years longer than originally planned and for the size of the program to be expanded to a Dr. Evil-ish €2,400,000,000,000. Here are the main points via Bloomberg:
- CB will extend its QE program beyond Sept. 2016, most likely until mid-2018, and it could reach EUR2.4t, S&P says in report.
- Expected amount is more than twice the original EUR1.1t commitment
- As EM currencies have declined, the euro has begun to appreciate again, complicating the ECB’s QE program
Note the last bullet there. This has become a self-perpetuating nightmare. Global QE is forestalling the creative destruction that in normal times serves to purge speculative exccess and correct capital misallocation, contributing the very same global deflationary supply glut that's tanking commodity currencies. The resultant pressure on EM FX then leads to relative strength for DM crosses jeopardizing inflation targets and leading to still more advanced economy QE. Of course when one DM central bank eases, the immediate effect is to trigger easing by a neighbor. The best example of this is probably the ECB-SNB-Riksbank connection and it means that this a never-ending Keynesian insanity loop, and in case the self-feeding dynamic wasn't strong enough as it is, when the EM meltdown finally filters back into DM markets, the attendant turmoil will also be used to justify more easing.
Summing it all up in one horrifying image...