The Euro area narrowly escaped deflation, for now

The threat of deflation has become the most dangerous development the euro area could fear from since January 2015, overcoming asset price bubbles and unemployment as the top priority issue. The threat even came with a financial cost that could endanger all the efforts made by euro area member-countries since the global financial crisis started.

“The cost of deflation protection (went) up by 185 basis points between December 2, 2014 and January 9, 2015, showing that investors saw a material risk that inflation could fall further and real interest rates could rise more,” explained Peter Praet, Member of the Executive Board of the ECB, in Berlin on April 23, 2015. And for what? According to Eurostats in Luxembourg, prices stagnated in April 2015 from a year earlier after falling 0.1 percent in the past month. The ECB has been instrumental in such trend reversal, experts said, after it launched a massive 1140 billion euros quantitative easing (QE) on March 1, 2015 with a view to re-anchoring inflation expectations and warding off potential tightening.

Two months later, here come the results since inflation expectations have increased across the euro area making possible anew both the ECB’s goal of returning inflation close to 2% by 2017 and further decreasing real interest rates as a result. However, some analysts have tempered general enthusiasm. They stressed that above-forecast inflation in Germany for April 2015 were still only a mere 0.3 percent, that short-term inflation has much depended on the quick rise in oil prices and that wrong anticipations of bonds’ lower yields because of ECB purchases could finally fuel volatility. Anyway with the deflation threat addressed for now, the ECB will likely heighten pressure on the euro area member countries for more reforms, more economic growth.