Deflation is imminent. With a certain time lag, this deflation could turn into significant inflation in the future. This could happen if the flooding of money from central banks and governments inflates the money supply in the real economic cycle. But back to the here and now. Deflation is imminent. There are already two concrete dates for this.
Deflation in electricity prices
Deflation is blowing towards us from the entire energy sector. Just think of the major shutdown in German industry. Car manufacturers have shut down their factories. Many other producers in the industry have also shut down their operations. This means that gigantic amounts of electricity are no longer needed. But the wind turbines continue to turn. So what happens? The supply remains the same (to put it simply), the demand drops quickly and rapidly. The price is falling. The Federal Association of the Energy and Water Industry has just made explicit reference to the falling electricity prices in the wholesale market as a result of the coronavirus crisis. While the future price for wholesale electricity on the Leipzig electricity exchange was still over 31 Euros in mid-February, it is currently only 20.33 Euros. If you look at comparison portals for electricity, for example, these massively lower wholesale prices do not yet appear to be reaching end consumers. Is that possible? Will the electricity providers withhold this massive price collapse from private end customers? Hard to imagine, because unlike in the past we now have very lively competition on the market for private end customers. But even if not … for large customers, should there be a significant drop in electricity prices? But the falling electricity prices probably have a deflationary effect overall.
Massive oil price deflation
And of course this is clearly deflationary. The price of oil has collapsed. In January, European Brent oil was still at 70 Dollars, now at 26 Dollars. In March alone, there was another brutal crash from 53 Dollars at the beginning of the month. The Saudis’ oil war and the collapse in demand thanks to the coronavirus are causing a double shock on the oil market, and the price of oil has collapsed brutally. A further decline is possible. Petrol prices at petrol stations have already reacted and will probably fall even further. In the monthly statistics for consumer prices for March, electricity prices, but especially energy prices, should bring noticeable deflation to the overall average. Can consumer prices on average stay in the positive range and avert deflation? Rising consumer prices in the supermarkets could have a positive effect against deflation on the overall average. It is possible that here and there, thanks to the coronavirus, more incraesing price consumer goods will push up the average.
Click here to watch the very latest video by Markus Fugmann about the “deflationary shock”.