Europeans and the Japanese have long been fearful of price deflation. This fear is probably based on the fact that mainstream economists and central bankers have this fear and express it often. That fear is called apoplithorismosphobia. They believe that deflation is a force that sucks an economy down and destroys it much like a black hole that sucks objects in and destroys them. The only evidence they have is that price deflation occurred during the Great Depression. They don't have a theory, reason or evidence. Indeed, the evidence suggests the opposite is true.
Now comes this report that shows that now that price deflation has occurred in Europe, the consumer is spending and some economies are showing signs of recovery.
The danger of deflation, economists will tell you, is that when prices start falling, consumers curb their spending in anticipation of even lower prices. (Why buy a car now if it might cost less a month from now?) That can send an economy into a downward spiral, as reduced consumer demand leads to lower production and in turn to job losses that drag down consumer spending even more.
But consumers in the euro zone have been buying more, even as the consumer price index has declined for three consecutive months after remaining nearly flat for much of last year. Consumer spending across the 19-nation zone picked up during the second half of 2014 and has continued this year, with retail sales in January up 1.1 percent from December. "There are clear signs that euro zone consumers are currently taking advantage of deflation or very low inflation to lift their purchasing," analysts at IHS Global Insight wrote in a March 25 report. Consumer spending, rising at about twice the rate of overall economic growth, "has been the main driving force for the euro zone economy since mid-2014," they wrote.
Deflation, it turns out, can sometimes be helpful.
The main contributor to Europe's current deflation is a sharp reduction in oil prices, as well as lower food prices. But prices of most other goods and services have remained fairly steady, reducing the temptation for people to hold off on major purchases.
At the same time, the weakening of the euro against the dollar is giving a competitive boost to European manufacturers, and some are starting to hire workers, which helps fuel consumer confidence. The European Commission reported this week that consumer confidence across the euro zone is at its highest level since 2008, with surveys showing more people expecting to make major purchases in the next few months. Even in Greece, confidence is at a five-year high.
The Bank of International Settlements has also issued a report debunking apoplithorismosphobia.
