Notes

Briefing
June 2015
EPRS | European Parliamentary Research Service
Author: Marcin Szczepański
Members' Research Service
PE 559.492 EN
Understanding deflation
Falling prices and their impact on the economy
SUMMARY
The possibility of deflationary periods occurring in the world's most advanced
economies is being signalled by many commentators. The effects of deflation on an
economy depend on whether the deflation is caused by falls in demand or rises in
productivity. The former is essentially detrimental to economic growth and may, in a
worst case scenario, develop into a hard-to-break, self-reinforcing deflationary spiral,
whereas the latter is believed to be conducive to economic growth.
Economists remain divided over the effects of inflation and whether or not it should be
mitigated at all times. Some claim that deflation always creates more problems than
benefits for an economy, and as such should be actively prevented. Others argue that
historical data do not show that inflation is preferable to deflation and that what
influences an economy most negatively is not the deflation itself, but the significant
fall in asset values (such as real estate or stocks) which often occurs first.
The euro area has experienced a period of low inflation since 2013, and recently
recorded successive declines in price levels. The European Commission and European
Central Bank, however, predict that price levels will start to rise in 2016, while the
International Monetary Fund and the OECD assess the risks of prolonged low inflation
to be higher. Economists and commentators remain divided regarding the possible
causes, risks, consequences and nature of this low inflation environment. Some
indicate that it will create conditions favourable to economic growth, while others fear
that persistent low inflation, or possible outright deflation, will be hard to mitigate and
will be harmful to economic recovery in the euro area.
In this briefing:  Background
 Deflation: causes and consequences  The economic debate
 Low inflation in the euro area
 Further reading