Europe is not at risk of sliding into full deflation but the current rate of inflation is dangerously low, European Central Bank vice president Vitor Constancio said at the weekend.
Many fear the eurozone, where annual inflation fell far short of the ECB’s medium-term target in October, could be set for a Japanese-style lost decade of deflation and recession.
During a debate in central Italy, Mr Constancio said he did not think “that in Europe there is the risk of falling into full deflation” because nominal salaries would have to fall in all member countries “and this cannot happen”.
It was not immediately clear what he meant by “full deflation”.
Mr Constancio echoed a pledge made by ECB president Mario Draghi, on Friday, to take action to raise inflation, which ran at 0.4% in the single currency bloc last month.
“This has to be done with monetary policy”, Mr Constancio said when asked who should intervene to raise prices. “It is the ECB’s responsibility.”
But living with inflation so close to zero is dangerous in itself, he said, because it makes it harder to repay public and private debt, and impedes economic growth. He added that inflation measurement is often inaccurate and that if the reading is “close to zero, in reality it is already at minus one”.
ECB president, Mario Draghi has moved closer to launching sovereign debt purchases and data this week will show just how dangerously low inflation has fallen in the $13tn eurozone economy. A sickly Europe has held back global economic growth for years, and now it is contributing significantly to powerful forces already dragging down inflation across the globe.
A spectacular drop in crude oil prices over the past month will be the centre of discussion when ministers from the world’s top oil exporters meet in Vienna on Friday.
The key question there is whether Saudi Arabia, which signalled last month it was comfortable with lower oil prices, accelerating a plunge in the price of crude to a third since June, will stick to that view.
However, rapidly-increasing US oil production, coinciding with shaky demand from China and Europe, is likely to keep a lid on the price no matter what the OPEC decides.
The latest Reuters poll suggests eurozone inflation relapsed to 0.3% in November, far from the ECB target of just below 2%.
“It is essential to bring back inflation to target and without delay,” Mr Draghi said on Friday.
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