Some economists and policymakers are beginning to worry that a danger of deflation in Europe, similar to the situation that strangled Japanese growth for most of the 1990s, is a bigger threat than inflation.
“It’s nuts: how can they be concerned about the inflationary impact of this?” says Carl B. Weinberg, chief economist of High Frequency Economics.
“If I were the head of the ECB, I would be printing money to avert the decline in the money supply,” he told the New York Times.
Deflation is commonly defined as a decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money — allowing one to buy more goods with the same amount of money.
Many economists regard deflation as more dangerous than inflation because it creates a downward spiral of lower demand and production.
Deflation is also bad for debtors like Greece because they may have to pay back money that would be worth more than it was when they borrowed it.
Inflation in the 16 countries that use the euro as their currency rose slightly in April, to an annual rate of 1.5 percent, from 1.4 percent in March.
Declines in categories like recreation and culture, communications and vacation tour packages blunted the impact of higher transportation costs. Core inflation declined to 0.7 percent in April from 0.8 percent in March, well below the central bank’s target of about 2 percent.
The European Central Bank has been buying government bonds to bring down European sovereigns' interest rates, but has also been taking short-term deposits from banks in an equal and countervailing amount, notes Vincent Fernando, CFA.
“This has meant that the net new liquidity from these measures has been zero, in a bid to prevent inflation from rising,” Fernando writes in the Business Insider.
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