Feeling Deflated?

Once the holiday season is over and a new year begins, all the expectation can be followed by a less exciting reality. It's called deflation, just like when a tyre or a balloon loses air.

In economic vocabulary, deflation describes a situation of falling prices, and in 2014 prices in the Eurozone dropped by 0.2%, largely due to the 50% decline in oil prices since June. This is a new reality and it's a reason to be concerned - but why?

In the short term, deflation may not be a bad thing because consumers get more spending power. They also have the possibility to save money and repay debts. However, in the longer term, deflation is a serious threat to economic growth because consumers begin to anticipate future price falls and delay purchases.

As in life generally, expectations in the economy drive both mood and behaviour. A little inflation is quite OK.


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