Falling prices can have a “benign effect” on the economy, the European Central Bank (ECB) said today, hitting back at critics of the current very low rate of inflation.
The ECB has a target of keeping inflation below but close to two per cent.
Currently it sits at 0.5 per cent, leading to calls from some economists to cut interest rates further or print money to push prices back up.
But the ECB is having none of it.
“A period of negative annual inflation does not in itself imply deflation, in a meaningful economic sense, unless the price declines become generalised and entrenched in inflation expectations,” said its monthly bulletin.
And although prices are falling in countries like Greece, this is “consistent with the normal functioning of a monetary union, as they help to restore competitiveness, i.e. they may be symptomatic of supply-side induced relative price adjustments.”
Even the IMF’s view that there is a 20 per cent risk of the Eurozone tipping into deflation by the end of 2014 is “highly misleading,” the ECB said, “as they do not make a distinction between the nature of shocks driving inflation, or examine the persistency of price dynamics.”
That’s Christine Lagarde told.