Mario Draghi, the head of the European Central Bank (ECB), spoke to the Brookings Institution in Washington this week (http://www.ecb.europa.eu/press/key/date/2014/html/sp141009.en.html).
He was very keen to emphasise that the ECB would ‘do what it takes’ to avoid the Eurozone economies sliding into deflation and another slump.
And financial markets and the international economic agencies of world capitalism are worried. At 0.3% yoy, Eurozone inflation is now at a five-year low, far from the ECB’s mandate of keeping the inflation rate ‘below but close to’ 2%. At the same time, inflation expectations, i.e. how much households expect prices to rise, has also been falling. When expectations fall, people tend to wait for prices to fall before buying and prices stop rising as a result. It’s self-fulfilling.
There is a real risk that the Eurozone economy will stop growing at all and enter a deflationary spiral. Indeed, the IMF in its…
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