Deflation Threatens World Market Health

Deflation Threatens World Market Health

The threat of deflation has reared its ugly head and economies across the globe are feeling the pressure. Consumer prices are falling and some economies - particularly Europe's and Japan's - are in danger of having inflation fall into negative territory.

Deflation Threatens World Market Health
Deflation Threatens World Market Health

The last time deflation occurred was in the aftermath of the 2008 financial crisis, to which banks responded with various monetary stimulus policies. As the US Federal Reserve terminates its bond-purchasing program, which helped inflate prices, the conditions may be right for inflation to dip below zero.

Investors are watching the situation closely, taking caution with their assets. As a result, many markets experienced a decline.

European stocks continue to fall
The Stoxx Europe 600 Index dropped 1.9% this morning, Bloomberg reported. The index lost ground for the eighth consecutive day - the longest decline in 11 years. Europe's benchmark index fell 9% since October 6 after the International Monetary Fund reduced its world growth forecast, German manufacturing output dropped and investor confidence fell.

"There is a combination of concerns over the outlook for global growth and concerns on the outlook for inflation in the wake of a slew of negative data," Jeremy Batstone-Carr, head of research at Charles Stanley & Co., told Bloomberg. "There is the likelihood that third-quarter corporate earnings expectations which have already been lowered may very well be lowered again over the fourth quarter given the poor macroeconomic backdrop."

US unemployment, stock market drops
A weekly unemployment survey released by the US government Thursday showed the lowest jobless claims number in 14 years, Market Watch reported. In the week ending October 11, unemployment filings fell by 23,000 to reach 264,000, a level not seen since April 2000.

While the data is good news for the labor market, stocks still opened lower on Wall Street. The S&P 500 and the Dow both slipped 1.1% while the Nasdaq fell 1.6%.

"There is no evidence of any softening in labor market conditions in early October and the jobless claims data suggest the labor market continues to improve ... at a more rapid pace than the Fed’s expectations," one economics analyst told Bloomberg.

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