Spain’s Warning Signs Of Japanisation- Shall We Buckle Up?

The Japanese people have been living under deflation for last 20 years and they seem to survive. The ghost of low prices are looming over the euro zone, giving political leaders a headache. Spain’s year-on –year February inflation fell to 0.0% against 0.2% in January, thus reopening the debate on eventual deflation, a Japanese style. Buckle up.

Six months in a row living with inflation near 0%, the underlying one almost at the same level. That’s the reality in Spain.

“If prices have not grown in food’s issues, inflation would have remained in red since VAT’s increase effect vanished  in September 2013,” analysts at Afi say.

Along with Portugal, Spain is the euro member with more price indicators’ components in red year-on-year rates, 40% against 20% of Europe’s average in spite of energy’s prices stabilization. That means that 2 out of 3 goods in Spaniards’ shopping basket are affected by deflation. Though good for the country’s competitiveness, these data prove a risk in the process of public as well as public debt deleveraging.

AFI analysts believe “other wider price’s indicators such as GDP’s deflator anticipates that Spain will be free of inflationist pressures in next two years. Last European Comission’s estimations fix a deflator under 1% by 2015, clearly in contrast with goals for core countries.”  An average deflator reduction of 0.5 points by 2014-2015 regarding EC’s base would increase GDP’s public debt ratio by 1.5 points.

However, deflation would also be an opportunity to take little, but some advantages. For instance, financial markets are considering low prices in the euro zone will not affect peripheral countries’ debt, and gaps between core countries and periphery will continue to be stable or even narrowing. On the other hand, Spanish Treasury as well as the rest of peripherals’ would also benefit via indexed- inflation bonds. Such advantages are meant to attract investment segments such as pension funds, and also postpone “financial charge”.