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European Quantitative Easing Hinges On… German Vacation Spending?

Posted on April 8, 2014

Whether or not the European Central Bank will take the quantitative-easing plunge is on the minds of investors around the world, including in the U.S. But in the end, the decision, or at least it’s timing, could revolve around German holiday-makers and the prices they pay for their spring vacations, argues Standard Bank’s Steven Barrow.

ECB President Mario Draghi last week revealed that ECB policy makers had discussed QE as an option. But he also seemed to convey the sense that a consensus has yet to emerge and that, really, the central bank would rather avoid the whole mess if only euro-zone inflation would revive a bit after sinking to a 0.5% annual rate in March — well below the official target of near, but just under, 2%. SEE: Draghi talks QE, but counts on Easter Bunny.

While the ECB still officially sees inflation threats as “broadly balanced” between upside and downside risks, plenty of economists are worried the euro zone is flirting with outright deflation.

So that brings us back to those vacationers from Germany — the euro zone’s largest economy. In his news conference last week, Draghi argued that inflation was likely to pick up again in April, partly due to the volatility of service prices in the months around Easter. Barrow explains the connection:

Normally, what happens after Easter is that German holiday companies reduce prices. Last year this was a massive 20.5% which pulled CPI in the month down by a mammoth 0.5 percentage points in April (as Easter was at the end of March). This year Easter is later in April and holiday price cuts probably won’t show up until May. Hence, if April prices are pretty stable this year, the annual rate will surge and total CPI inflation is likely to rise as well.

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One thought on “European Quantitative Easing Hinges On… German Vacation Spending?

  1. I can understand their fear of deflation, but I hope they do not jump into QE. The huge QE program in the US creates enough danger to an artificial economy without added pressure from Europe. I can see no way that the air will slowly trickle out of this balloon. I fear, when it comes, the pop might be more of a bomb burst. See my blog at http://cranky-conservative.blogspot.com