deflation

Price inflation is not inevitable. One of the most common explanations for price growth is identifying it with capitalism. The argument is that inflation is unavoidable as the economy grows. It is thought that for businesses to have an incentive to invest and wages to grow, the prices of goods and services should rise in the first place.

Already in May, the National Statistical Institute of Bulgaria announced long-awaited news: on a monthly basis, the general consumer price index recorded a decline for the first time since the beginning of the war, and in June, this trend continued, even more noticeably. This has also been accompanied by a cooling down of the annual price change, which has fallen well below its peak since autumn 2022.

While the European Central Bank, governments and many economists complain about the danger of deflation a currently published microeconomic analysis from the famous Kiel Institute for the World Economy tells a different story.

Perceiving deflation through the prism of an unmitigated disaster is today as unassailable as motherhood. Over the course of the past week, three different media outlets asked three INESS analysts to give their take on the “perils” of falling prices for the European economy.

Any persistent defence of the euro will result in a long-lasting recession and high unemployment in countries using fiscal austerity to pursue ‘internal devaluation’. It may lead to a revival of populist and nationalist movements, political collapse and disorderly eurozone break-up.