Eurozone Fears Deflation

Written by | Tuesday, February 4th, 2014

While unemployment remained steady throughout January, eurozone inflation slowed further down, thus exerting more pressure on the European Central Bank (ECB) to get ready for the possibility of deflation. The 18-country currency block, which is still making efforts to recover from the sovereign debt crisis, logged the rate of inflation of 0.7 percent in January. It is a further decline as December’s inflation was 0.8 percent, according to the Eurostat. These figures are well below the ECB official inflation target of 2 percent, which is why the dangerously falling rate of inflation is expected to be high on the agenda during this week’s ECB high-profile meeting.
Eurostat reports that the falling inflation is likely a side-effect of the plunge in energy prices from zero percent in December last year to 1.2 percent in January. Deflation also seems to raise concerns in Washington as Christine Lagarde, the chief of the International Monetary Fund (IMF), has recently warned against the risk of deflation despite positive growth outlook. Analysts agree that the latest developments concerning the rates of unemployment and inflation is putting the ECB under significant pressure as the bank will have to struggle more to guard the economy against the risks of deflationary pressures.
Deflation – falling prices in real terms – can motivate consumers to postpone consumption of goods and services in the expectation that waiting longer can make them even cheaper. This, however, weakens the economy as businesses lower their output accordingly negatively affecting job creation and consumer demand, thus creating a vicious circle. In the meantime, joblessness remains steady, yet still high. Although unemployment rate is indeed stable across the eurozone with 12 percent in December last year, economists agree that this figure is still unfortunately damagingly high.

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