Business cycle The risk of dangerous deflation in the euro area is rising again: inflation slowed to -0.2% in August

Inflation in the euro area has been below 1% since March, far from the European Central Bank’s target.

Eurozone the sinking into a severe recession due to a contraction in demand and supply caused by a coronavirus pandemic will naturally also affect price developments.

According to preliminary data published by Statistics Europe on Tuesday, the inflation rate was -0.2 per cent in August. A significant reason for the fall in prices was the fall in energy prices. Negative inflation is a sign that the economy is in turmoil.

Based on preliminary Eurostat data, the core inflation closely monitored by central banks was either 0.6% or 0.4% in August, depending on the method used. The effect of energy and food on the change in price levels has been removed from core inflation.

Inflation rate the euro area has been below 1% since March, although it should be slightly below 2% over the medium term, according to the European Central Bank’s price stability target. In July, it was 0.4 percent.

“The euro area is in danger of deflation in the coming years. To combat this risk, the European Central Bank has stepped up its monetary stimulus, ”says Swedbank’s chief economist. Heidi Schauman.

Deflation is the opposite of inflation. It therefore means lower prices.

Widespread deflation is a serious disruption to the economy. As prices fall, there is a risk that companies will delay their investments and households will curb their consumption because they believe prices will fall even more in the future.

Deflation is very detrimental to indebted businesses and households, as the real value of debt increases as the purchasing power of money increases.

Fact

The inflation process
■ Inflation means a general rise in the price level. As a result of inflation, the purchasing power of money weakens.

■ The inflation process starts when companies pass on their increased costs to consumer prices. As a result, wage earners are beginning to demand wage increases.

■ Inflation can be caused by two factors: rising demand or rising costs.

■ If aggregate demand in the economy grows more than aggregate supply, demand inflation will result.

■ Cost inflation means that higher prices of raw materials or other factors of production raise producer prices. Over time, it will also lead to higher consumer prices.