Inflation crashes across Europe amid pandemic

Inflation rates in both the UK and eurozone tumbled last month to their lowest in almost four years, official figures showed on Wednesday.

David-Sapsted-200520b
Britain’s inflation rate declined from 1.5 per in March to 0.8 per cent in April while, in the eurozone, the drop was from 0.7 per cent to 0.3 per cent last month. A year earlier, the rate in the zone stood at 1.7 per cent.In both cases, the substantial fall in fuel prices and discounting of certain items - but not food - because of the Covid-19 outbreak, were major factors.Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the figures indicated that inflation had taken a "big leap towards zero by the summer" with retailers already planning further, large price cuts.
And while he forecast that the UK inflation rate was likely to pick up in 2021, it was still likely to remain below the government target of two per cent."The inflation outlook, then, supports the (Bank of England's) Monetary Policy Committee doing more to stimulate the economy at its next meeting in mid-June - we look for a further £100 billion of quantitative easing to be announced," he said.Jeremy Thomson-Cook, chief economist at Equals Group, agreed that weak economic demand would keep prices low. "With headline consumer inflation at 0.8 per cent and producer price inflation falling 5.1 per cent in April alone, courtesy of the recent declines in oil prices, we are more likely to hear concerns about deflation from central bankers," he said."As we have noted in the past, you need to have demand to create inflation and, for now, there is little demand. Some will return as employees earnings recover and more businesses reopen allowing consumers to spend more on different sectors but, similar to the pace of the economy reopening, is likely to be slow.”However, Tom Stevenson, investment director at Fidelity Personal Investing, suggested that inflation could spike once the pandemic was over, as a result of the huge stimulus measures launched by central banks and governments."The drop in inflation to its lowest level since 2016 reflects a fall in petrol costs as well as the impact of lower end demand on factory gate prices," he said.“In the short term, disinflationary pressures will mount as the economy slows under lockdown, consumers become more cautious and companies start to prepare for life beyond furlough support by reducing their workforces. Further out, there is a growing fear that monetary and fiscal policy choices could lead to higher inflation, perhaps significantly so.“Investors have started to prepare for a more inflationary environment by adding to their holdings of gold, the traditional hedge against rising prices. The precious metal is trading close to a seven-year high.”Meanwhile, the World Trade Organisation (WTO) warned on Wednesday that global trade volumes were likely to “fall precipitously” in the first half of 2020 because of the coronavirus pandemic.The WTO said its goods barometer was “flashing red” with a fall in trade volumes resulting in a drop in the index to 87.6, the lowest reading since the index (which has a 100 baseline) was launched four years ago.There was “no sign of the trade decline bottoming out yet”, added the WTO, adding it feared global merchandise trade could decline by between 13 and 32 per cent in 2020 because of the pandemic.

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