EU inflation has fallen to an annual core reading of 0.8 per cent, which is much lower than the ECB was expecting. This reading borders on deflation, and the essential issue is that inflation remains in a downtrend; a downtrend that, if it continues, points at a deflationary situation in Europe. While the trend is normally your friend, as it typically tells you when to buy an asset, a downward trend in inflation is not the friend of any economy. As southern EU countries scramble to regain competitiveness, it is commonly imagined that the various labour markets are forcing wages lower, thereby forcing inflation lower, as shown in diagram 1 below,
Small business credit squeeze
Yet, this is not the only problem, and the downtrend in core inflation seems firmly entrenched.