Conventional economic wisdom suggests that a little inflation is desirable in an economy, but too little or too much is not. The risk of high inflation is obvious, but the case for too little inflation being a problem is less clear. It is suggested that should the rise in prices turn negative – deflation – consumers and businesses might be inclined to delay significant purchase or investments because the items in question might cost less at a future date. Should such considerations become prevalent then it represents a drag on demand and can trigger further, negative economic events. Consequently, most central banks aim for low, stable inflation of 2 to 3% - if wage increases are below these figures, then the effective purchasing power of those concerned declines, of course.
The ECB target for inflation is 2% (covering nations which use the Euro). It was last at, or above, this target in 2013 and hit a low of
-0.2% in February last year, remaining at, or below, zero for four months. The latest inflation figure for December shows a “surge” over the previous reading from 0.6 to 1.1% (annual data), taking it to its highest level since September 2013.
The higher inflation figure has been attributed to increased costs for energy which climbed by 2.5% over the year to December. The price of food, alcohol and tobacco also rose, but by 1.2% and services were also dearer by the same amount.
Currently, the European Central Bank is anticipating that inflation will remain below target until 2018 at the earliest, but may not hit the goal until 2019.