Videos | April 14, 2014

Deflation? The real risk is eurozone “lowflation”

There is a lot of talk about the risk of deflation in the eurozone, but the real risk lies in “lowflation”, ING economists say. In the April economic update video for eZonomics, ING senior economist Teunis Brosens highlights the damaging consequences of what he calls lowflation – and details ING forecasts for the region.


Deflation vs lowflation
Deflation is a persistent fall in prices and happens when the rate of inflation falls below zero. As this eZonomics explainer says, deflation tends to be a bad sign for an economy.
In the video update, Brosens says that although Eurostat flash estimates show annual inflation in the eurozone fell to 0.5% in March 2014 (well below the European Central Bank target of below but close to 2%), lowflation not deflation is the real risk.

It’s different to Japan
Brosens compares the situation in the eurozone with that in Japan, which has faced problems with deflation for more than a decade.
“The reason why deflation is not such a worry is that only 20% of goods and services are showing actual price declines in the euro area. In contrast, in Japan’s periods of deflation, this was typically 50% or more,” says Brosens.

ECB “ready to act”
However, Brosens says lowflation can still cause damage.
He explains how it can make it more difficult to pay debt and improve competitiveness.
He says ING projects inflation in the eurozone to slowly recover to 1.5% by the end of 2015.
“If lowflation does occur, the European Central Bank will be ready to act,” he says.

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eZonomics team
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