Low Inflation Worries the Euro Zone
Prices in the 17 European Union member states that were
using the euro in 2013 have risen in December at an annual rate of only 0.8
percent. The European Central Bank seeks to keep price growth steady at about 2
percent. Europe is experiencing disinflation and if the rate of inflation keeps
falling, Europe could face outright deflation. Deflation increases the real
value of debt and may aggravate recessions and lead to a deflationary spiral
(decreases in price lead to lower production, which in turn leads to lower
wages and demand, which leads to further decreases in price). While an increase in the purchasing power of
one’s money benefits some, it amplifies the sting of debt for others. After a
period of deflation, the payments to service a debt represent a larger amount
of purchasing power than they did before deflation.
