How low must the inflation rate fall before the European Central Bank (ECB) acts to avert the greater danger now looming – deflation? So far, the ECB has been reluctant to intervene, although the euro area rate of inflation slowed to 0.5 per cent last month- its lowest level since late 2009, and even though weak growth and high unemployment remain common features of most euro zone economies. The ECB's mandate obliges it not only to achieve price stability, but also to support "the general economic interests of the Union". To date, however, the bank's concern has been with the former and not the latter, with curbing inflation rather than safeguarding economic growth.
Inflation, which in the euro area is running far below the bank's 2 per cent target rate, continues to decline. The inflation rate in the euro zone is far lower than that in the United States (1.1 per cent) or Britain (1.7 per cent). Price pressures in the currency bloc have proved far less than anticipated. And a strengthening euro, while lowering the import prices of energy and food, has done little to boost recovery and, in particular, to assist Europe's peripheral economies that are struggling to emerge from recession.
The case for the European Central Bank's governing council to ease monetary policy at its meeting on Thursday could hardly be stronger. The pressure on it to do so has also greatly increased. The Federal Reserve, the US central bank, has steadily reduced its monetary stimulus in recent months, which has had a depressing effect on global demand.
Disinflation rather than inflation has become the greater global threat. Disinflation is, as Christine Lagarde, managing director of the IMF, has said "the ogre that must be fought decisively".
Japan has paid a heavy price for many years of deflation; that of economic stagnation, from which it is struggling to recover. The ECB should recognise the real danger that deflation presents, and act to ensure it cannot take root.