Deflation? For many it has been going on for more than a year. This is stated by a study conducted by the Research Area of Banca Monte dei Paschi di Siena. Indeed, in all the countries of the Eurozone, with the exception of Malta and Latvia, producer prices have been falling for over twelve months.
Despite the rebound in inflation recorded in April, and despite the ECB's efforts to combat the trend decline in prices, which would lead the whole of Europe into a liquidity trap similar to the one Japan fell into in the 90s, not the moment to claim victory still seems to have arrived: the contraction in producer prices, in fact, worsened in the last quarter. In March 2014, prices fell by a further 0,7% compared to December.
Furthermore, all this is accompanied by consumer price inflation which erodes consumers' real wages and risks putting further pressure on business costs.
Among the countries most affected by the drop in producer prices there is also Italy which, in the last year, experienced a drop of 1,9%. But the contraction in prices also affected France (-2,1% y/y), Germany (-0,8%) and Spain (-1,2%) to different extents.
For companies, the deflation of producer prices means a greater burden of their debt, i.e. the greater the downward pressure on prices and the more difficult it becomes for companies to honor their commitments, a phenomenon that weighs even more heavily in those countries with a higher degree of indebtedness, especially if accompanied by a reduction in bank credit.
Among these, Italy clearly stands out, among the most exposed to the risks of deflation. The leverage of Italian companies in 2012 (according to Bank of Italy data) amounted to 48% against the 41,5% of the Euro area average. If the decline in producer prices and the high corporate debt are combined with difficult access to credit, the situation risks becoming unsustainable.
Thus, Italian companies, even more than European ones, find themselves operating within a very difficult framework, while deflation reduces their profitability and solvency. A problem that the ECB cannot ignore.
