The adjustment in the periphery of Europe has two dimensions. The first, which has dominated developments, was prices. One way to boost competitiveness is for euro area member to have lower inflation than Germany. 

The second involved the real economy and structural reforms raise the potential growth rates. The former appears nearly exhausted, while the latter risks the already fragile social support.  

The first is a look at the Big Mac Index over recent years for a select group of euro area countries. With a notable exception of Greece, there were no significant changes in Big Mac prices. There are no more price declines.  Italy, Netherlands, Portugal and Spain never really experienced a decline in prices, but rather the pace of increase is slow. However, the price of Big Macs is also steady in Germany for the past two years. 

The two Great Graphics posted here come from Brugel.  

But this is still anecdotal. Brugel also posted a chart that shows core inflation, which excludes energy and unprocessed food. It has not been above 1.0% since last August.

Greece especially has experienced deflation, though it has slackened. Cyprus core inflation spent some time in negative territory, but it is slightly positive now. The same can be said of Portugal, though to a lesser extent. Spain's core inflation has more recently dipped into deflation. 

The euro zone reports the flash CPI estimate for July tomorrow. The consensus expects an unchanged pace at 0.5% on the headline and 0.8% on the core rate. The risk is on the downside. Germany and Spain's inflation figures will be reported first and the consensus expects the harmonized measure in both countries to slip lower (Germany from 1.0% to 0.8% and in Spain from 0.1% to -0.1%).     

The ECB's staff forecast 0.7% CPI this year. It has averaged 0.6% in the first half of the year. This means that the ECB's staff is assuming inflation is bottoming. A softer report will likely weigh on the euro on ideas that it raises the likelihood of asset purchases by the ECB.  

Past patterns suggested that asset purchases could underpin the euro by attracting more funds to the peripheral bond markets. However, in recent weeks, that relationship has broken down. We have argued that the foreign inflows appeared to have slowed and that other flows, such as dollar-based investor purchases of bad loan portfolios and M&A activity has a more muted impact in the foreign exchange market.  Recent mutual funds and ETF tracking reports suggest there has also been outflow from the euro area equities.