German Producer Prices are set to fall -3.6% in the year to May, the largest decline in 22 years. The reading foreshadows continued downward pressure on consumer inflation as cheaper wholesale prices are passed on via a lower final price tag. German CPI came to a standstill in May and is poised to head into negative territory from here. The onset of deflation in the Euro Zone’s largest economy is all but certain to take region-wide inflation along the same trajectory, threatening to commit the currency bloc to a long-term period of sub-par economic growth as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.

As we noted last week, the present situation argues for a far more forceful monetary response than anything that has been introduced by the European Central Bank thus far. Overnight index swaps suggest that traders are pricing in virtually no chance that the ECB will lower rates at the next policy meeting and quantitative easing will be difficult to expand beyond the modest measures announced earlier this month given the internal conflict about such policies within the central bank. This opens the door for traders to punish the Euro as they price in expectations that the region will substantially lag behind other industrial economies in recovering from the current downturn, forcing interest rates to stay lower for longer than elsewhere.

Tags: Deflation, Economic Growth, Economy, Euro, Euro Zone, Europe, European Central Bank, Germnay, Inflation, interest rates, Producer Prices

This entry was posted on Friday, June 19th, 2009 at 12:16 am and is filed under Currency Trading, Economic Indicators, Economy, Euro. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.