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Europe – weirdness is not stagflation

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Eurozone price inflation is the highest since 2012. Almost every part of inflation has gone up (except unprocessed food). While inflation rates rose, Eurozone economic growth slowed in the third quarter of the year. Is this mix of slower growth and rising inflation what the media love to call "stagflation"?
  • This is not stagflation. Weird factors have affected both growth and inflation.
  • Spanish growth was stable and French growth accelerated, but German growth has clearly been weaker. Problems in the auto sector have reduced economic activity. This is temporary. Autos will add to growth in the future. (Growth today is weaker because there is less supply in the economy. Lower supply would normally increase inflation pressures).
  • Inflation in the Eurozone has been kept artificially low over the past year. Italy lowered a government controlled price last year (tuition fees), which lowered inflation. That effect has ended. Tight European labor markets (a signal of economic strength) have pushed inflation up too.
  • The US has had similar data issues in the past (the famous "Verizon effect", where one company's quality changes led to a decline in inflation despite no price changing). Investors should focus on trends, and understand when temporary or non-market factors create noise.