U.S. and Europe CPI’s Falling, but Germany Dismisses Deflationary Risks

In an interview with CNBC late last week, Germany Finance Minister Steffen Kampeter dismissed growing concerns at investment banks, think tanks, government agencies, and central banks that deflation has become inevitable in Europe.

“This is not what economists and textbooks describe as a deflation spiral, this is a modest price development,” he said in a statement.

In an interview with CNBC late last week, Germany Finance Minister Steffen Kampeter dismissed growing concerns at investment banks, think tanks, government agencies, and central banks that deflation has become inevitable in Europe.

“This is not what economists and textbooks describe as a deflation spiral, this is a modest price development,” he said in a statement.

Despite Kampeter’s remarks, many market participants have bet on falling prices in Europe, causing bond yields to fall and revenue expectations for European companies to decline. Already seeing the likelihood of further decline in the euro, the Swiss Central Bank has abandoned its currency cap, allowing the Swiss franc to appreciate against the euro.

“I do see the facts and the fact is the core inflation is rising,” Kampeter noted, adding that the fall in prices is mostly from commodities and raw materials.

Germany’s economy shrank 0.2% in the second quarter of 2014 and rose 0.1% in the third quarter. While that means the country shrank across both quarters, it technically avoided a recession by seeing a modest rise in GDP in the third quarter. However, many analysts have cut their growth expectations for Germany in the fourth quarter.

U.S. Deflation

Prices in the United States fell steeply, driven by a 9.4% fall in gasoline prices. According to the Bureau of Labor Statistics, the Consumer Price Index for urban consumers fell 0.4% in December on a seasonally adjusted basis. Over the last 12 months, the index rose 0.8% on an unadjusted basis. That is the smallest annualized rise since 2010.

Prices for all items except for food and energy were flat in December, after a 0.2% rise in October and a 0.1% rise in November.

While prices are falling, consumers are growing increasingly confident. The University of Michigan Consumer Sentiment Index rose to 98.2, the highest reading in over a decade, and up 5% from the prior month. A mixture of job growth and cheaper energy underlay the change in attitude.

“Gains in employment and incomes as well as declines in gas prices were cited by record numbers of consumers,” said Richard Curtin, director of the Michigan Survey of Consumers. Curtin also noted that people are likely to see more robust wage growth in January, after data from the BLS indicated wages fell in December. “More consumers spontaneously cited increases in their household incomes in early January than any time in the past decade,” he said.

Many economists attribute the optimism to greater purchasing power, but recent data indicates retail sales are not rising even as prices fall.