Deflation Haunts the Eurozone

Eurozone policymakers have tried virtually everything at their disposal to fend of deflation, but this most dreaded of all economic trend remains a real threat.

Euro zone money supply growth slowed sharply in December and loans to the private sector contracted further, putting pressure on the European Central Bank to take fresh action to counter the threat of deflation. ...

The ECB has cut interest rates to a record low, pumped extra liquidity into the banking system and announced a fresh government bond purchase program, but the measures have so far not managed to unclog lending to the real economy.

Reuters, Jan. 29

Deflation was also on the minds of attendees at the just-concluded World Economic Summit in Davos, including the head of the International Monetary Fund.

[Christine Lagarde] warned that deflation remains a real risk to economic recovery in the eurozone. ... Eurozone inflation, at 0.8%, remained 'way below' the 2% target set by the European Central Bank.

BBC, Jan. 25

Note this point:

One of the most crucial aspects of deflationary psychology is that it's self-perpetuating. That is, falling prices push consumers to postpone major purchases as they wait for prices to fall further. In turn, demand drops and corporate profits shrink, driving wages lower and making society's already unbearable debt burden virtually impossible to repay.

This downward spiral is what makes deflation such a dreaded economic condition.

Read the full Reuters article here.

Read the full BBC article here.