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Why Low Prices Can Be Bad For The Economy

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What's going on?

Inflation is the rate at which prices rise over time – and in Europe it’s become a persistently low rate. Consumer prices were only 0.2% higher in August this year than one year ago.

What does this mean?

One of the main aims of the European Central Bank (ECB) is to get the rate of inflation closer to its target of 2%. A little bit of inflation is a natural result of a steadily growing economy. It is much better than ‘deflation’ (falling prices), which can lead to people and companies holding off on making purchases and thus making the economy even worse.   A desire to increase the inflation rate is one of the main motivations behind the ECB’s ‘quantitative easing’ (QE) that was initiated in March. QE is the buying of European government bonds by the ECB and, in theory, helps to stimulate economic growth and therefore inflation.

Why should I care?

  1. QE is very supportive of bond prices and somewhat supportive of European stock prices. At the moment, it is scheduled to end in September 2016, but if inflation remains stubbornly low, QE could be extended – which would, on balance, be good for both bonds and stocks in Europe.
Originally posted as part of the Finimize daily email.

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