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Here's What the European Central Bank's Preferred Inflation Gauge Shows

Is Europe leading the world into a deflationary depression?

Well, consider that the International Monetary Fund just lowered its estimate of eurozone growth to a mere 0.8%. More than that, Germany risks "slipping into a third recession since 2008" (CNN).

Also, ECB President Mario Draghi's preferred inflation gauge shows a trend that's a big worry for the Continent's financial authorities.

Read this excerpt from Elliott Wave International's November 2014 European Financial Forecast:

If Europe's economic debate were a prizefight, then the deflationists -- who have languished on the ropes for years -- just landed some dizzying counterpunches. [Consider] the 5-year/5-year forward swap (5y5y), a financial agreement where one counterparty exchanges a fixed rate of interest for a floating rate. "This is the metric that we usually use for defining medium-term inflation," said ECB President Mario Draghi during his August 22, 2014, speech to central bankers in Jackson Hole, Wyoming.

Draghi may use the swap to define inflation, but ... the 5y5y swap points unequivocally to deflation. In fact, the swap started to nosedive more than a year ago, when the October 2013 European Financial Forecast first discussed the deflationary portents of a similar gauge, the 10-year breakeven rate. By mid-August 2014, the 5y5y had sunk below the central bank's 2% target for the first time ever. And after September's brief rally stalled at the 2% level, the swap hit an all-time low of 1.54% last month.

In other words, even the central bank's preferred inflation metric shows nothing but flat or falling prices over the foreseeable future.