Lesser political risk in Europe would increase prices

The latest figures of Germany’s Consumer Price Index (CPI) have brought further reinsurance that the risk of deflation has moved away at least for some time from the euro area. A whole new context far different from what it was just one year ago has been instrumental in driving prices up, one may think.

Indeed, political risk has reduced dramatically after neither the Netherlands nor France politically chose to follow the United States’ America first and the United Kingdom’s pro-Brexit steps.

The election of pro-European liberal Emmanuel Macron as French President instead of Eurosceptic rightist Marine Le Pen has brought huge political relief to pro-Europeans who think it extends the European Union (EU)’s – and the euro area – life expectancy, this way partly stabilizing the euro markets as a whole and driving inflation in Germany close to the 2 percent goal set by the European Central Bank (ECB).

Against the backdrop of stable catching-up energy prices, some economists have therefore started talking about reflation in conjunction with growing expectations of rising interest rates.

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