Report
Patrick Artus

Euro zone: Is 2% inflation really preferable to 1% inflation?

The ECB continues to fight to drive up euro-zone core inflation to 2%, while it remains close to 1%. But can we be certain that an inflation rate of 2% is better than 1%? If household incomes (wages, pensions) are only partially indexed to inflation, then a rise in inflation from 1% to 2% reduces household purchasing power; A rise in inflation increases the inflation tax; But, given the likely inflation measurement error (overvaluation of services prices) and the Balassa-Samuelson effects (gap between price rises in industry and services), an inflation rate of only 1% may lead to deflation in certain sectors; Lastly, an inflation rate of 1% leads to an equilibrium with low nominal interest rates, and to a limited capacity to cut rates if necessary because of the zero lower bound of nominal interest rates. The under-indexation of certain incomes to prices is therefore the only argument that would be positive for inflation remaining at 1%; an increase in the inflation tax is positive for the government and negative for private economic agents; the other arguments (risk of deflation, limited potential for fall in nominal interest rates) are in favour of an inflation rate of 2% .
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

Other Reports from Natixis

ResearchPool Subscriptions

Get the most out of your insights

Get in touch