Whe goes shopping these days, sometimes doesn’t believe his eyes. You can even discover a cauliflower for an impressive five euros. In normal times, half would have been steep. And apart from such extreme cases, fruit and vegetables have become significantly more expensive in the crisis months. In return, the crisis has made gasoline and heating oil cheaper and relieved consumers’ budgets.
It has been official since Friday: The inflation rate in the euro area fell to 0.1 percent in May. At least that’s what the preliminary figures from the European statistics agency Eurostat say. This means that at least almost the zero limit that analysts at Commerzbank had expected for May was reached.
The prices in the euro area are practically stagnating. In April, euro inflation was still 0.3 percent. In Germany, inflation was still 0.6 percent in May: Energy prices in the euro area fell more sharply than at national level (minus 12 percent, in Germany minus 8.5 percent). Food, alcohol and luxury goods rose by 3.3 percent, services by 1.3 percent.
Money supply increases, inflation falls
Meanwhile, the money supply in the euro area has grown faster than expected. The broad M3 money supply increased by 8.3 percent in April compared to the same month a year earlier, as the European Central Bank announced. The most recent growth rate was in October 2008. This money supply comprises the cash held by non-banks plus the sight deposits held with banks and savings banks, time deposits up to two years in duration, savings deposits with a statutory notice period of up to three months as well as selected short-term securities such as money market funds and money market papers.
The narrower amount of money M1, which includes cash and sight deposits from non-banks, grew by 11.9 percent compared to the previous year. Lending to households, on the other hand, only increased by 3 percent in April compared to the same month a year earlier, which was slightly less than in March (3.4 percent). In contrast, the growth rate of corporate loans increased from 5.5 percent to 6.6 percent in April.
Holger Schmieding, chief economist at the Hamburg bank Berenberg, said that this was not unusual. In the crisis, the demand for cautions is increasing: “Households want to spend less and instead invest liquid reserves – companies draw large amounts of credit lines to be liquid.”
Increase by 500 billion euros?
The low inflation rate is also exciting in view of the next monetary policy meeting of the Governing Council next Thursday. The central bank, which is targeting inflation below, but close to 2 percent, could expand its PEPP bond purchase program. Frederik Ducrozet, economist at Bank Pictet, expects a € 500 billion increase and an extension until September 2021. Indications from ECB Executive Board member Isabel Schnabel and French central bank chief François Villeroy de Galhau this week have been suggested in this direction.
On the other hand, it seems controversial whether the ECB permanently leaves the capital key in the crisis program, according to which the bond purchases are distributed to the euro countries. Villeroy de Galhau indicated on Tuesday that the flexibility of the program was at least as important as the volume, and the capital key was an unreasonable restriction.