The annual rate of inflation across the 17 countries that then shared the euro fell further below the European Central bank's target in December, rekindling fears that too little inflation, rather than too much, could threaten the currency area's fragile recovery.
The European Union's statistics agency Tuesday said a preliminary reading showed consumer prices rose by just 0.8% over the 12 months to December, a decline in the annual rate of inflation from 0.9% in November. The rate of inflation was last lower in October, when it touched 0.7%, prompting the ECB to cut its benchmark interest rate to a low of 0.25%, the last action it took to stimulate the economy. The ECB targets an inflation rate of just below 2.0%.
The European central bank just announced an across the board prices cut on goods. The return on reserves drops one percent and the price of goods will drop the same. As long as the bank keeps rates below inflation the Euro becomes more valuable. Increasing value of the Euro and decreasing prices restores volatility across the consumer basket of goods.
If the economy was in balance, then the consumer holds more cash in reserve and supresses purchase prices, this restores money to neutral. The producer sees existing two year holds earn more, in real terms, the banker lowered rates. So the producer can also lower prices. This continues pretty quick down the chain. Cash freed up today will buy more goods than before the rate lowered.
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