Is the Euro Zone dealing with the same deflationary issues that the Fed was grappling with a few years ago?
With the drop in headline euro-zone inflation to 0.3% in August from 0.4% in July, calls for further ECB action—including large purchases of sovereign bonds—are getting louder. Clearly, inflation is far adrift of the ECB’s target of “below, but close to” 2%.
With core inflation stable, it is hard to see deflation as a threat, even if market-based measures of inflation expectations have proved wobbly recently. More relevant in any case is the attitude of consumers and entrepreneurs to inflation. If lower food and energy prices are proving a cushion for stretched individuals and businesses, then that may be no bad thing. But the longer low inflation persists, the more it may become a problem if, for instance, it starts to drive wage settlements.
(Source: WSJ)
