Assessing Deflation Risk

Inflation is declining across most of the industrialised world. The inflation rate is well below the target rate of 2.0% set for it by central banks in the US, euro area and UK. The downward pressure on prices in Europe is especially marked. Inflation rates have dropped below 1.0% in most European countries and, for the euro area as a whole, prices fell by 0.2% in the year to December. In the UK prices rose by just 0.5% over the same period, the lowest reading in 25 years.

In the coming months, as lower oil and other commodity prices feed through to consumers, inflation pressures are likely to moderate and, in Europe, deflation, or outright declines in prices, will become more prevalent.