Which is the Bigger Threat in Europe' Inflation or Deflation?
The answer may vary based on location, but ask almost any German if inflation or deflation is the bigger threat to Europe and the answer will be an emphatic "inflation." The Germans have a particular sensitivity to inflation and are prepared to react to any threat as soon as it even hints at manifesting. The historical connection between rampant inflation and the rise of the Nazi Party in the 1930s is etched into the German psyche. Besides that, wealthier societies, like Germany, are far more sensitive to inflation than others anyway
If you ask the rest of Europe which of these two are causing the most concern, you will likely hear the other response. Even the European Central Bank is starting to become more concerned that inflation targets are consistently undershot. It is not as if people want inflation to come back, but a little inflation can be something of a tonic to an ailing economy, at least in the short run.
The latest statistics show that consumer prices rose by just 1.1%, indicating the sluggish economy of Europe is still mired in high unemployment and weak growth. The factors that tend to drive inflation include wage pressure, higher producer prices and more expensive commodities. In the beginning, this kind of price hike is welcome news, as it signals that some of the damage from a recession has eased. There is not much chance for wage inflation as long as unemployment rates are in the double-digits. The price of products will not rise when the consumer is too broke to afford the current prices.
Therefore, the ECB is under no real pressure to hike rates. There is even some possibility the ECB would cut rates except for the fact that there is no real evidence that this would provoke growth. The real message from all these low inflation predictions is that the ECB will stand firm for a while longer.
- Chris Kuehl, PhD, Armada Corporate Intelligence