The euro zone may be in stagflation, not deflation

Population ageing and the lack of productivity gains mean that potential growth in the euro zone will be low for a long time to come. We therefore have a choice between a stagflation scenario (low growth, high inflation) and a deflation scenario (low growth, low inflation). We believe that the scenario of stagflation with fairly high inflation will become reality for the following reasons: The lack of productivity gains and the decline in the working-age population are keeping labour markets tight, leading to fairly high growth in unit labour costs and core inflation; Given low net corporate investment and weak growth in the capital stock, the supply of goods and services continues to grow slowly, while demand for goods and services remains excess ive .