FORUMBLOG.ORG – 3 DICEMBRE 2014 Why is Europe’s inflation so low?

Inflation in the Eurozone stood at 0.4 % (year on year) in November. It has been persistently declining for almost a year, and constantly undershooting forecasts. The Eurozone is now clearly diverging from many advanced economies, where inflation is either on the rise – albeit at moderate levels – as in the US, or, when falling, still remaining close to target, as the UK. Inflation has kept falling even in ‘core ’ economies, where employment remains strong and the output gap has been reduced, such as Germany. Recent data show little prospect for improvement. According to the October World Economic Outlook (IMF 2014b), under current policies, the Eurozone inflation rate “is expected to remain substantially below the ECB’s price stability objective through at least 2019”. This column explores one specific conjecture, that underpinning those evolutions, including the lack of growth, is one single and common factor – an excess demand for ‘safe assets’. Essentially, economic agents develop a strong inclination for holding money and government bonds, in preference to any other financial or real assets; and, doing do, are induced to cut down on their expenditures. This is both a sign and a consequence of extreme risk aversion. As a result, Europe may be caught into a ‘safety trap ’ from which there is no escape other than a temporar