If You Love Austerity And Spending Cuts, You Better Love Deflation Too

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Spain’s consumer prices fell in April for the first time since data was first collected. Annualized core inflation hit 0.1%, after rising +0.2% in March. On a month to month basis, prices fell 3% vs. March.

As Alphaville highlighted, this is horrendous news for a nation struggling with high levels of private debt. A paranoid government rushed out to reassure markets that this deflation would not continue in the coming months.

Nevertheless, this means that Spain, Slovenia, Portugal, and Ireland are currently experiencing falling prices, according to Luigi Speranza of BNP Paribas.

Worse yet, the austerity measures Spain is currently trying to push through, will only likely exacerbate deflationary forces by exerting downward pressure on near-term economic activity. Yet Spain has little choice since they’re otherwise faced with a likely financial crisis should they not cut government spending.

Thus being forced to enact austerity measures, Spain could have no choice but to face deflation risk at the same time. Given that price declines are already happening for other European periphery nations in addition to Spain, there’s then clearly a risk of deflation hitting all periphery European nations who will (hopefully) push through austerity measures in order to get their finances in order. Spending cuts are necessary since the current situation is untenable, but we may need to accept European deflation or at best disinflation for the European periphery in return. The balancing force, which could temper this, might oddly be the suddenly currency-printing-happy ECB.

See how ugly Spain’s austerity budget would be if it came to the U.S. >

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