Deflation in Europe Becoming Self-Fulfilling

Inflationists don’t want to talk about the D word. But people are.

As a socionomist and chart analyst, one thing that has irked me throughout the years has been when people contend that chart readers engage in a self-fulfilling prophecy. “Oh,” they say, “if everyone is looking at the same level on a chart then it becomes self-fulfilling that the price will hit / advance above / decline below it.” After I have counted to three (ok five, after all I am an Elliott Wave guy) in my head and have breathed deeply, I calmly explain that the chartist community is small compared with the entire market and it is unconscious herding behavior that drives trends over every time scale.

It’s rather similar in economics. Economists worry over price deflation becoming self-fulfilling if people talk about it a lot and it becomes ingrained in people’s psyche. Then people start to expect lower prices, perhaps putting off buying stuff in the interim, leading to lower economic activity, lower prices and even more ingrained price deflation. But economists miss the point that the ingraining of price deflation expectations is driven by the unconscious herding behavior of humans which underlies trends in social mood.

European officials are concerned about this now because more countries are moving into price deflation. In late October, European Central Bank President Christine Lagarde stated that she didn’t see any deflation threats “at all.” In order to try and stop the perceived self-fulfilling process the ECB is burying its head in the sand and not seeing what is directly in front of it.

Across the continent there are increasing signs that lower prices are becoming more widespread. The Bank of Spain’s Chief Economist stated last month that “We are seeing an increase in the portion of goods whose prices are increasing very little or falling,” and Spain’s central bank is concerned that a Japanese-style stagnation of prices is setting in. The chart below of Spanish CPI certainly seems to point that way.

Expect more people to be talking about deflation in the months ahead.

Spain CPI DEC 2020