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Further Fall In Eurozone Producer Prices

James Boston
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One of the few benefits of a lack of inflation in an industrial economy is the competitive advantage that can be gained due to falling input prices. This situation creates a potential bright spot in the faltering Eurozone economy as the core economies, which are significantly manufacturing based, gain a cost advantage in the international markets, this allied to a falling currency price and lack of wage growth should in time provide a trade lead boost to single currency bloc. The latest Producer Price Index (PPI) for the Eurozone is showing a further deepening of the rate of contraction according to the October figures just released. Month on month the rate of decline in producer prices is now being measured as -0.4%, this is slightly below the expected -0.3% and represents a turnaround on the September 0.2% expansion. On a year on year basis the PPI for the Eurozone is showing a twelve month fall in producer costs of -1.3%, this reading is very much as expected and moderately picks up on the September reading of -1.4%.

Depressed input prices across the board are benefiting European producers and one of the key contributors to the reduced cost base is a pronounced fall in the price of energy. Oil prices have sharply declined in the past six months in response to slowing global demand. European energy reserves including oil, natural gas and renewables are continuing to build as the mildness of this continental winter has reduced residential demand. The heretofore expected expansion in the industrial sector has also failed to materialise and this is keeping demand pressure off of energy prices in general. The Eurozone economies that are experiencing output growth tend to be more services focussed and therefore do not significantly augment energy demands. On the horizon however is a threat by Russia to cancel the construction of planned Europe bound gas pipeline, this won’t have an immediate effect as demand is low and reserves are high but it could become a restricting factor in the medium to long term.

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