Article published in Les Echos l’Avis (France) on 25 February 2014

The main news on the financial markets is that inflation is trending downward in the euro zone. This is regarded as a major challenge for the European Central Bank, which, if mismanaged, could plunge our countries into Japanese-style deflation. Mario Draghi and his colleagues have rightly pointed out that this scenario is highly unlikely, but the issue nonetheless remains a source of concern.  

Is disinflation such a bad thing? For the moment, disinflation has several winners. Household purchasing power has improved more than if inflation was higher; real interest rates are not as low; the central bank can conduct a flexible monetary policy, which is good news for the financial markets. The markets are also being driven by the hope of new measures from the ECB. 

But there are also losers, such as borrowers, beginning with governments, as the real value of debt doesn’t fall when inflation is low. Equity investors which benefit from disinflation should however beware. Disinflation reflects a lack of growth and makes it harder for the economy to react to monetary stimulus. If it lasts, it will ultimately cause disappointment in corporate earnings growth.

 

William De Vijlder

Vice – Chairman of BNP Paribas Investment Partners