Not only has Portugal entered into deflation, but it has been joined by seven other nations within the EU.
In Portugal, prices fell 0.4% in March from a year earlier. The same drop also hit Sweden, making it the first and only state in northern Europe to slide into deflation.
Eurostat data showed that six other EU countries slipped into deflation in March, with Bulgaria at -2%, Greece -1.5%, Cyprus -0.9%, Spain and Slovakia -0.2%, and Croatia -0.1%.
The Netherlands is borderline at 0.1% inflation, but it is so close that it is causing deep worry for Dutch households struggling with loans near 250% of disposable income, one of the highest in Europe. Dutch house prices have dropped by a fifth. A quarter of mortgages are in negative equity.
Deflation in Portugal and Spain is “a doubled edged sword”, according to the chief economist of the International Monetary Fund. It should improve competitiveness and boost exports while also crushing domestic demand. That leads to lower economic output and further deflation.
Additionally, deflation forces up the real value of the national debt, making it harder for governments to meet repayments.
Although the European Central Bank and the IMF dispute the remedies, all appear to agree that the longer the situation prevails, the harder it is to reach the inflation target of just below 2%.
Meanwhile, the UK has the highest rate of inflation of all the EU countries, 1.6% in March. The EU average is 0.6%.
