Deflation Continues in Germany

posted by Nima

July 30, 2009 · Posted in Global Economics

Deflation is and has been a global phenomenon for a while now. Germany, too, is not exempt from it:

Consumer prices in Germany, Europe’s biggest economy, posted their first annual decline in 22 years this month largely as a result of lower oil prices, preliminary government data showed Wednesday.

Prices were down 0.6 percent on the year in July — the first fall since March 1987, when they declined by 0.3 percent, the Federal Statistical Office said.

It said the decline was fueled by sharp year-on-year declines in energy and fuel prices, which peaked in July 2008.

Germany’s inflation rate hit zero in May and edged up to 0.1 percent last month. Several other European Union nations have reported a fall in prices this year.

Contrary to what the article goes on to assert, deflation is of course a desirable phenomenon that restores balance and sanity.

As I explained recently, regarding deflation in Japan:

Two fallacies in common reports in the media:

1. That there is a possibility of an impending deflation. – The truth is: Deflation is here and now, has been for a while, and will be for a while.

2. That we have to “fear” deflation. – The truth is: Deflation is a good thing, as I pointed out a couple of times:

Deflation is in essence a correction of the previous misallocations created by inflation.

What turns deflation into a bad thing? When the government tries to stave it off by spending billions and trillions of dollars, thus prolongs the correction, continues the misallocations, and increases the debt burden on the taxpayers. If you want to get an idea of the long term outlook for the US economy, look at Japan. The credit and stock bubble there burst in 1989, and has been deflating on and off since then.