Inflation Aint So Easy!

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What's going on?

In contrast to the US, where the rate at which prices are climbing (a.k.a inflation) is ticking up somewhat, inflation remains very low in Europe. New data out of Germany on Tuesday suggested thats not going to change anytime soon

What does this mean?

Prices that German manufacturing firms pay for things declined in August versus July. This isnt necessarily a big deal, but when coupled with news from a few weeks ago that German consumer inflation is also falling (i.e. the living expenses of a typical German), it highlights how difficult its been to generate inflation in Europe. The European Central Bank (ECB) has been implementing extreme measures to try to boost the economy and increase inflation, but they both remain well below target.

Why should I care?

The bigger picture: Higher inflation would help reduce Europes heavy debt burden.
Inflation is a measure of how much the value of money erodes with time (i.e. higher inflation means 1 will buy less in the future). For that reason, those that have borrowed money tend to like inflation: it gets easier to pay back that money in the future. More inflation would be helpful for Europes economy partly because many European companies carry a lot of debt. If they could more easily reduce their debt, it would free up money to be spent on economically productive things like building more factories.


For markets: Very low inflation would usually encourage the ECB to act but it already has!
The ECB says there is plenty more action it could take, but many investors feel that any further measures would likely be even less effective than those already taken – which, as were seeing, arent (yet) doing the job. Its that sort of end of the road mentality that has some investors fearful of what will happen if the economy and inflation dont pick up.

Originally posted as part of the Finimize daily email.

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