Deflation in the euro zone: Desperate times, desperate measures

We are hosting a round-table discussion of the risk of deflation in the euro zone. So far we have heard that there are both short- and long-term risks of deflation, and that Europe needs to keep an eye on the emerging markets. Next up is Andrea Ferrero, associate professor in the Department of Economics, Oxford University. 

Deflation in the euro zone is far from being a remote possibility. In January, headline inflation, as measured by the European Central Bank (ECB), preliminarily came in just a tad higher than last October’s record low of 0.7% on a year-over-year basis. Core inflation registered its minimum (also 0.7%) since the inception of the common currency, and has not breached 1.5% in more than a year. Most importantly, both headline and core indicators exhibit a clear downward trend since the summer of 2012.Deflation is bad for several well-known reasons (just ask Japan). But for a central bank, even positive inflation below target should be a reason to worry. The ECB’s Governing Council interprets its price stability mandate “…as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”, with the qualification that inflation rates should be “…below, but close to, 2%, over the medium term.” Misses between half and one percentage point for almost a year should raise serious concerns among policymakers in …

Link to article: www.economist.com/blogs/freeexchange/2014/01/deflation-euro-zone-0?fsrc=rss

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload the CAPTCHA.