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. [...]
[...] The main risk is that inflation is spreading and becoming self- sustaining through wages. Even if they are not indexed to prices, (except in Luxembourg and Belgium) employees can claim an increase in compensation to make up for the effects of inflation. Indeed, when consumer prices rise, there is ultimately, a decline in real income (ratio between nominal income and general price level) where generally a roll wage demands, in principle, an increase in nominal wage which increases the inflationary process. [...]
[...] But this assertion is questionable insofar as, an increase in liquidity is not necessarily a harbinger of inflation. Moreover, there are countless scientific studies, including those carried out by the national central banks of the Eurosystem, which demonstrate the non-inflationary qualities of those funds. When prices rise, it takes more money to provide the same volume of transactions. In this case, the increase in cash is not the cause of rising prices, it is the result. In all markets, prices are set by sellers (supply side) and not by the plaintiffs (the demand side) what triggers rising prices can only supply an action. [...]
[...] We are in a convergence phenomenon where prices rise in emerging countries, but not ours." Production costs grow, in fact, faster in emerging countries, but are hampered in OECD countries. This period of disinflation (or low stable inflation) will continue as emerging countries are gaining market share, which is still the case, especially for China. In the medium term, inflation is increased by the upward trend in commodity prices. Eliminating the speculative price peak, it is likely that the increase in commodity prices will add 0.8 percentage point trend (per year) inflation in the eurozone. The effect of the "great moderation" policy formulated by the ECB against inflation. [...]
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