The PPI is not the ECB’s mandated inflation variable. The central bank prefers the broader consumer-based HICP. But the drop in the PPI excluding construction at -0.8% in March, at -10.5% over three months (saar), at -12.3% over 6 months (saar) and at a minus three percent over 12-months is nonetheless a compelling piece of evidence for the ECB to confront. Capital goods inflation at +1.5% Yr/Yr is the high inflation reading for the three main sectors. Consumer goods prices are lower by 1.2% over 12-months and intermediate goods prices are lower by 4.1% over 12-months. Europeans are not as worried about deflation as policymakers in the US, yet they can’t deny these trends.

Inflation, its breadth and its trends all point to the nearly complete absence of anything that could be called inflation. Indeed there is growing evidence for those who want to worry about that opposite concern: deflation. On top of that, the European economy is very weak.

The controversial aspect of this is that Europe’s finance ministers are not applying any new stimulus and the head of the European Commission, Jean-Claude Junker, said that no policies except those that are already approved should be implemented. That appears to be an oblique warning from Junker to EU countries not to go off on their own with any new programs of assistance. Even so Junker admits to a growing unemployment crisis in Europe. Of course Europe has a more extensive social safety network than the US. But as the EU Commission and the OECD and the IMF have cuts forecasts the EU Commission has been prepared to sit idle and wait for the results of its past stimulus plans to play out. Moreover, the ECB has been content to let the Bank of England and the Federal Reserve take the more aggressive monetary policy actions.

So if there is a risk it is that Europe is getting behind the curve and perhaps, along with that, a growing risk of deflation. The continuing sharp drop in inflation – indeed, persisting negative rates of inflation- hint at an ongoing economic unraveling. However, recent economic data have suggested in several ways that the economic tailspin had begun to enter a more controlled phase.

In Spain, programs to arrest sharply rising unemployment seem to be having some impact. In Germany a car scrappage scheme seems to have boosted car registrations. The EU PMI for manufacturing shows a rise in that key sensitive cyclical index that suggests the pace of economic unraveling its slowing and that signal is echoed across Main EMU countries. So while Europe’s policies may tread a riskier path that those in the US there is also some evidence of economic responsiveness to the counter cyclical policies already implemented and of course there is that cushier social safety net in Europe.

Nonetheless, this drop in the PPI is sharp, the largest drop in 22 years. It is putting pressure on the ECB and is expected to result in another rate cut from Europe’s central bank at its next meeting. Reasons to oppose such a drop are increasingly scarce.