Fears of a deflationary spiral in the eurozone are back this week as official figures show that prices are rising at their slowest pace for four years, writes The Sunday Times.
Reporting on the meeting of G20 finance ministers in Sydney, Australia, last weekend, the weekly paper said that “pressure is building for the creation of firm growth targets”.
The problem of deflation is that it effectively increases the value of real debt and so can aggravate recessions. A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which then triggers further decreases in price.
It is feared this vicious circle can have disastrous consequences. The Great Depression was a typical deflationary spiral.
“Economists say the risks in the wider eurozone are growing, because inflation in bigger economies, such as Germany and France, is weak, at 1.3% and 0.7% respectively,” explains the Sunday Times.
Investment banker Daniele Antonucci said: “We think the market ought to be more worried about deflation even if it is a low-probability event as the expected returns from most assets in this environment would be very low or negative.”
Officials at the Bank of England are also said to be worried. “Greece is already mired in deflation, with prices falling 1.8% in the year to December, and Portugal, Spain and Ireland are perilously close.”
The European Central Bank is expected to step in to ward off disinflation at its March meeting with a cut in its main lending rate. The Sunday Times suggests the ECB “could also impose negative interest rates, effectively charging banks for deposits”.
