Deflation doesn’t benefit production

(De) inflation-deflation in Europe is the result of substracting the inflationary effect from the rise in VAT. The chart above is by Bond Vigilantes.

But let’s now see the impact on the price level in Spain, for which I’ll take the Saint Louis FED’s consumer price index (excluding the energy variable):

consumer price index deflation

The price level has decreased, not only regarding the maximum from 2007, but also the one recorded in 2000, when the bubble had not yet started. This is extremely serious for producers of goods and services.

Let’s add one activity index such as the industrial production index (IPI), so as to get an idea of the impact of price and volume together (I could have chosen the GDP, but I don’t trust its reliability).

IPI deflation

As you can see, the picture is quite devastating. It refutes the liberal theory that the adjustment of prices and wages boost the demand (?) and production (?). However, what we really see is an accumulated and huge loss of productive capacity. We can’t see anywhere that the adjustment in the level of prices/wages accelerates the recovery because prices have been falling for 7 years so far.

According to Mr Guindos, “Spain is in the path of growth.” I don’t think such path will take us too far.

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://

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