This is from Britmouse:
And while we are at it, here’s another interesting graph from Britmouse:
Deflation is bad if it comes from the demand side, and causes firms to cut output because they see falling profits as prices fall. Thus if you focus on inflation (not a good idea!), at a minimum you should be looking at prices net of VAT. In Europe the austerity has involved VAT tax increases, which cause the ECB to tighten policy, driving NGDP even lower. You see the demand shock in the inflation rate net of VAT.
Note that I’ve always argued fiscal austerity can reduce output if the central bank is stupid, for all you people who think I’ve been an ideologue on the issue.
HT: W. Peden