The unprecedented price drops come in the wake of four consecutive downward adjustments which began in July, when eurozone inflation peaked at 4%. The estimated 2.1% rate in November is good news per se, because it is the closest that the bloc has come to achieving the 2% target pursued by the European Central Bank for months.
On the other hand, the sharp decline in prices, matched by recession and surging unemployment (which hit 7.7% in the euro zone in October, according to Eurostat), is fuelling fears that they will continue to fall. If so, eurozone countries may face a deflationary scenario similar to the experiences of the Great Depression in 1929 or Japan's 'lost decade' in the 1990s.
Lorenzo Bini Smaghi, an ECB board member, explained in a 25 November speech that deflation manifests itself when "the expectation of future price reductions induces households to postpone consumption and firms to reduce wage costs and delay investment, also in view of the higher rate of return". Many experts believe this is now happening in Europe.
Bini Smaghi warned against confusing positive disinflation with deflation. "In my opinion, the term 'deflation' is often misused as a catch-all phrase to describe every kind of negative development. This can obviously be dangerous, as it could lead to the wrong policy advice, much like a wrong diagnosis may lead to the prescription of an overly aggressive medical treatment."
However, EU Commissioner for Economic and Monetary Affairs Joaquin Almunia made clear when speaking before the European Parliament ten days ago (17 November) that Europe was going through a period of recession "with risks of deflation".
Faced with a scenario of falling prices and economic recession, many observers expect the ECB to cut interest rates once again at its board meeting on 4 December, after having decided upon a fifty-point cut in November. The current 3.25% rate might be slashed again by fifty points to reach the lowest figure since November 1999, when it was at 3%.
