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Can one fear a return of inflation in euro area?

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  1. Introduction
  2. The reasons for the Irish "no"
    1. The context of the referendum
    2. The reasons for the rejection
  3. The ways out of the crisis
    1. How did the crisis happen?
    2. What to do now?

John Paul II cried "Do not be afraid!"Trichet added "Take back your minds!" In both cases, the aim is to build trust and faith in order to avoid fear. The fear of rising prices and declining purchasing power followed. Inflation can be defined as a process of cumulative gains that are self-sustaining in the general level of prices. This process differs from the sectoral increases in some prices, even if they are strong and those yet to be generalized throughout the economy. For fifteen years, Western Europe experienced a period of price stability. This stability contrasted with the previous fifty years marked by persistent inflation over the past thirty years during the oil shocks. However, last year, inflation has made a spectacular comeback in the public debate. Not only in the euro area, but the title of the topic invites us to limit ourselves to the latter. In the euro zone, inflation reached 3.2% yoy in January 2008, its highest level in ten years. It is important to recall that the Euro zone Economic and Monetary Union or EMU is a monetary area which includes the countries of the European Union that have adopted the euro as their single currency. It has 15 European countries (it should exclude the United Kingdom, Denmark and Sweden). Several criteria are needed to join the euro zone, in particular, low inflation (i.e. inflation rate not exceeding more than 1.5 points of the 3 countries with lowest inflation). Although a decline in inflation was recorded recently in the euro area, rates are still above levels consistent with price stability (inflation rate of the ECB being fixed around 2%). The upside risks to price stability have diminished somewhat, but have not disappeared. This leads us to ask the question: is there a fear of a return of inflation? Is there a reason to fear a double-digit inflation as was the case in 1970 in Europe? Is this a legitimate threat or concern that is unfounded?

[...] The second return of inflation is as follows: inflation in commodity prices, an end to the dynamics of the great moderation policy. As for Europe, it is in a situation of false stagflation, with the risk of Chinese inflation and American deflation The first-round effects are directly recorded and related to the increase in price indices specifically, food and energy components. Definition The index of consumer prices (CPI) measures the average level of prices of goods and services consumed by households, weighted by their share of the average household consumption. [...]


[...] The significant potential of disinflation in the euro area 1. There has been no inflation in the Eurozone that has domestic origins or from the thrust of labor costs The speculative bubble in terms of commodities has burst. (But the long term cannot be ignored, inflationary pressures reappear due to rising demand from emerging countries, see Part 3. The disinflationary effects of the appreciation of the euro (including those through increased market share of the euro) And most importantly, very weak growth prospects can be considered low inflation. [...]


[...] Current concerns focus on possible inflationary pressures building via the "pass through" mechanism The central question for monetary policy is to what extent the sharp rise in commodity prices will be transmitted to the whole economy. Moreover, this transmission will be deeper and the inflationary shock will become tireless. The term ?pass through generally used to describe this phenomenon of transmission to final prices. This is the only way we can gauge the risk of inflation. What are the risks of the inflationary spiral? The consequences of the first round are not limited. [...]


[...] INFLATION BY DEMAND: Demand-pull inflation i.e. this occurs when the aggregate demand exceeds the available supply at any given time. This increase in demand may be due to public spending, private consumption expenditure and investment. There is an increase in production, an increase in distributed income and also an increase in demand. For fifteen years, Western Europe has had a period of price stability. This stability came after fifty years of persistent inflation that occurred due to several events including the post-war boom and the oil crisis. [...]


[...] Lowering of the prices of manufactured goods, given the drop in demand, especially for manufactured goods whose demand is linked to loans and to households (household goods, durables etc.) curbing wage rises through higher unemployment. The disinflationary effects of lower growth. The medium-term outlook: It is possible that economies will fall into a long period of deleveraging during which domestic demand will be depressed and sustainable growth can only come from exports. In this economy, there would be compression and result in lower labor costs and low inflation. Emerging countries remain disinflationary, excluding the impact of commodity prices. [...]

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