Preliminary estimates of Germany’s [B]Consumer Price Index[/B] are expected to show that the annual inflation rate fell to -0.1% in June, the first reading in negative territory in 23 years. We had noted the likelihood of such an outcome last week as Producer Prices were set to tumble to a similar low. The onset of deflation in the Euro Zone’s largest economy is all but certain to take region-wide inflation along the same trajectory, threatening to commit the currency bloc to a long-term period of sub-par economic growth as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.
As we have argued previously, the present situation argues for a far more forceful monetary response than anything that has been introduced by the European Central Bank thus far. Even so, recent comments from ECB officials have stressed that rates at 1% are “appropriate” for the time being and quantitative easing will be difficult to expand beyond themodest measures announced earlier this monthgiven the internal conflict about the merit of such policies within the central bank. This opens the door for traders to punish the Euro in the weeks and months ahead as they price in expectations that the region will substantially lag behind other industrial economies in recovering from the current downturn, forcing interest rates to stay lower for longer than elsewhere.