EU, Deflation Fears Could be Realized

With all the price volatility buyers have had to manage the last several years, one would “never say never” and they can “expect the unexpected”.

… consider Ireland, which has suffered an astonishing 16 consecutive months of price deflation. The Irish CPI fell by 2.1% year-on-year in April. This deflation action is beginning to make Japan's experience of the past 20 years look like a picnic because Ireland, unlike Japan in the 1990s, remains in fiscal contraction mode. Thus, the Irish government aims to reduce its deficit to 10% of GDP in 2011 and then to 2.9% in 2014 from 14.3% last year…

Others in the euro-zone will surely follow. Spain has potentially a huge deflationary cycle to endure given its level of consumer leverage and the degree of anticipated fiscal tightening. Spain's household debt-to-GDP ratio was 83% at the end of 2009, and Spain has to refinance €165 billion of maturing government debt by the end of 2011.

Buyers with fixed priced contracts – that thought they had a good deal – actual may not.