The financial Times is reporting Eurozone edges closer to recession.

The eurozone moved closer to recession on Thursday after it emerged that the economy contracted in the second quarter for the first time since the launch of the euro.

The economy shrank by 0.2 per cent in the three months to June, as inflation driven by commodity prices wiped out growth.

France was hit badly, contracting more than expected.

Yet, while concerns mounted in Europe that the weakness in growth could prove protracted, evidence of growing global inflationary pressures continued to build. Just hours after the eurozone figures were released, US data showed consumer prices rose twice as fast as forecast by economists in July, hitting an annual rate of 5.6 per cent – the highest since January 1991.

The surprise jump damped hopes of a quick easing of inflationary pressures in the US, suggesting US Federal Reserve policymakers will continue to be concerned about rising prices.

In the eurozone, inflation was a record 4 per cent in July, according to Eurostat, the European Union’s statistical office, although that was lower than its original estimate of 4.1 per cent.

Adding to the alarm, forecasters’ expectations for inflation in the longer term were the gloomiest since the euro was introduced in 1999, the European Central Bank reported on Thursday.

Misguided Inflation Fears

It should not take a genius to figure out how ridiculous this statement is “The surprise jump damped hopes of a quick easing of inflationary pressures in the US, suggesting US Federal Reserve policymakers will continue to be concerned about rising prices.”

I said it should not, but apparently it does, otherwise the statement would never have been made. Here’s the deal:

  • Commodity prices, especially crude prices are tumbling.
  • What’s important is where gasoline prices are headed not where they were.
  • What’s far more important still is what’s happening with the credit markets.

For a discussion of the above, please see Implications of the Slowing Global Economy.

Mike “Mish” Shedlock
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