Inflation within the Eurozone fell from 0.7% in February to 0.5% last month, marking its lowest level since November 2009, and the third straight monthly decline. The European Central Bank (ECB) has a target inflation level of 2% and the ECB President, Mario Draghi, has described inflation of less than 1% as “the danger zone”. The reason why deflation (i.e. falling prices) is regarded as problematic for an economy is that it can cause consumers to delay major purchases in the hope that when they do buy the goods, the price will be less than it is today. The Japanese economy has been largely stagnant for years and one factor blamed for this is deflation within the economy which stifles domestic demand.
Unsurprisingly, within a bloc of 18 nations, inflation is variable from country to country. With its specific economic difficulties therefore, it is perhaps unsurprising that inflation in Spain stands at -0.2% year-on-year for March.
Prices within the Eurozone continue to rise, albeit slowly, and the ECB has warned that it expects a prolonged period of low inflation. However, some analysts have been predicting that the bank will act to stimulate the economy in the light of fairly weak economic recovery and deflationary pressure.
At its most recent meeting, the ECB decided not to change interest rates which remain at 0.25% where they have been since November 2013. The ECB could shave a little of interest rates, making loans cheaper and enticing businesses to borrow money for expansion (so the hope goes). The ECB has refrained from the “quantitative easing” measures adopted by the USA, Japan and UK as a mechanism to boost liquidity within the Eurozone. There is speculation that the bank may adopt such a policy, however, its widely believed that the Germans are reluctant to take such a move for fear of risking high inflation in the future. It will be remembered that the Weimar Republic suffered from hyper-inflation in the inter-war years.