One of the reasons why the European Central Bank has started quantitative easing is to tackle deflation.
In a deflationary environment, local demand for goods and services is weak, and prices fall with spending and consumption.
Buying government bonds increases the amount of money circulating in the region. By keeping interest rates low, the ECB hopes to encourage spending and borrowing, instead of saving. Many central banks across the world have also cut rates in the last few months.
But for Deutsche Bank’s Torsten Sløk, concerns about deflation around the world are overblown. In the US, for example, the personal consumption price index (a measure of inflation) is still shy of the Federal Reserve’s 2% target.
“It is true that inflation is trending lower in many countries because of falling energy prices. But looking at core inflation for the G20 countries the chart below shows that there are no countries experiencing deflation at the moment.”
The euro fell to new lows against the dollar this week after the ECB started its bond buying program. Sløk says the weak euro is precisely what the bloc needs to tackle deflation:
“The problem with this argument is that the falling euro is going to push up both headline and core inflation in Europe over the coming one or two years and the same pattern is coming in other countries that are depreciating relative to the US dollar. The bottom line is that maybe we will see higher or lower core inflation if we look 2-3 years out but what I feel very confident about is that the initial effect here and now of a significant depreciation in your currency is that it will create inflation.”
Here’s Sløk’s chart showing that there’s no deflation in any of the world’s major economies.
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