Eurozone’s Nascent Signs of Stagflation

Stagflation according to Wikipedia.org is a situation in which the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high

This Bloomberg article entitled Euro-Area Unemployment At Record, Inflation Quickens: Economy suggests that the Eurozone is now suffering from stagflation.

Euro-area unemployment rose to a record and inflation quickened more than economists forecast as rising energy costs threaten to deepen the economic slump.

The jobless rate in the economy of the 17 nations using the euro was 11.3 percent in July, the same as in June after that month’s figure was revised higher, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995. Inflation accelerated to 2.6 percent in August from 2.4 percent in the prior month, an initial estimate showed in a separate report. That’s faster than the 2.5 percent median forecast of 31 economists in a Bloomberg survey.

A 12.4 percent surge in crude-oil prices over the past two months is leaving consumers and companies with less money to spend just as governments seek ways to contain the debt crisis. European economic confidence dropped more than economists forecast to a three-year low in August and German unemployment increased for a fifth month, adding to signs the euro-area economy continued to shrink in the third quarter.

“The whole euro zone is undergoing negative growth developments,” Don Smith, a London-based economist at ICAP Plc, told Ken Prewitt on Bloomberg Radio yesterday. “The sense is that increasingly the euro-zone crisis is bearing down on countries in northern Europe and Germany in particular and this is really forcing officials’ hands toward coming up with a firm solution.”

Europe’s nascent stagflation in pictures,

All three elements of stagflation, namely, elevated CPI or price inflation, contracting economic growth and high unemployment rates appear to be intact. (chart from trading economics)

And the so-called “firm solution” for policymakers translates to even more inflationism by the European Central Bank (ECB).

From the same article…

The ECB, which in July cut its benchmark interest rate to a record low of 0.75 percent, is working out details of a plan to purchase government bonds of distressed nations along with Europe’s rescue fund. So far, neither Italy nor Spain has asked for help from the bailout facility, the European Stability Mechanism.

The central bank, led by Mario Draghi, will hold its next meeting on Sept. 6 in Frankfurt.

“There may be a little bit of disappointment,” Piero Ghezzi, head of global economics at Barclays Plc, told Mark Barton on Bloomberg Television’s “On the Move” on Aug. 29. “A solution in Europe could be coming from the ECB if they were willing to do unlimited and unconditional purchases.”

Policymakers are fighting the last war. Incipient signs of stagflation will likely turn into intractable inflation or a deepening phase of stagflation once the next round of “unlimited and unconditional purchases” becomes a reality.

The ECB’s actions will then be likely complimented by the US Federal Reserve this September, and perhaps by other central banks such as BoJ, SNB and the BoE or even possibly China's PBoC soon.

These concerted inflationism by global central bankers could bring about the "worst of both worlds" for the global economy.