You may have heard a lot in the media about deflation in the Eurozone, however what does this actually mean for the economy?

Deflation is the opposite of inflation so is actually when prices fall over time and products become cheaper. This may sound like a really good thing from a consumers point of view as you can buy items today on average, cheaper than they were last year. It is like having a long lasting sale across the whole economy. 

The problem however is that deflation scares people as much as high levels of inflation. People start to fear that this can not continue to happen and if it does then businesses will need to start reducing costs. The main cost for most businesses is wages, so redundancies are feared by some, causing them to start saving and not spending. This is why deflation is seen as bad, it is effectively proof of declining living standards, especially if you start to get deflation of wages. There is some proof of this in the Eurozone with countries like Greece and Spain having unemployment rates of around 25%.

Of course all this deflation at the moment is being blamed on the reduction in the cost of oil and falling energy costs. This could be a good thing if the additional disposable income is actually spent in the economy by consumers. There is some evidence this is the case in the UK as consumer confidence is much higher than the Eurozone and rather than deflation, we have inflation at around 1%. The Bank of England and the European Central Bank have targets for inflation of 2%.

The European Central Bank to try and encourage consumers to spend and to help get consumers spending is being encouraged to print more money. The technical term for this is known as quantitative easing (QE), however some investors are not so keen on this approach as this devalues a currency something that is not good for importers, however benefits exporters.


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