Worries about excessive debt and inflation are unfounded

The corona crisis arouses fear of rising prices and an exploding debt burden. There are reasons that speak against it. A guest post.

Is inflation coming?

We live in a time of great economic policy challenges. Our economy needs greater digitization and is still far from being climate-friendly enough; there is a great need to invest in care and education. At the same time, it is important to cushion the negative effects of the pandemic on employment as much as possible.

The state is required to cope with these challenges. That arouses other concerns in parts of the population: of growing national debt and inflation. In the current situation, however, these are unjustified.

The euro area has been experiencing a historic phase of low interest rates for seven years. Since March 2016, the key interest rate of the European Central Bank (ECB) has fallen to the previous low of zero percent. Despite low interest rates and a very expansive monetary policy through bond purchases in the “Asset Purchase Program”, the ECB has missed its target of an inflation rate of below, but close to, 2 percent in the euro area in recent years. Between July 2013 and January 2017, the annual inflation rate was below 1.6 percent and since April 2019 we have been observing falling inflation again. The euro zone is currently in deflation again due to the corona crisis: consumer prices are falling.