Inflation returns to Euro zone - Essay Example

Inflation returns to Euro zone Euro zone has eventually returned to the situation of inflation in May with consumerprices increasing more after prior five months of instability: falling and stagnation. This return to inflation has resulted from the rising costs of food and the impacts of the existing cheap energy. The statistics that the European Union indicated that the nineteen countries that share the Euro rose to a 0.3% year on September 2013 after a flat reading that was recorded in April.

This was 0.2% more than the market expectation (Morris 1). Despite the fact that the given statistics failed to incorporate monthly data, the annual data revealed that the expensive and unprocessed foods and other services had the highest impact. The inflation rebound numbers that were experienced indicated that the quantitative erasing or the sovereign program used to buy bonds had brought the best results in a rapid time frame. This program was started in March to enhance more cash injection in the economy to prevent the presence of deflation.

However, the burning question is whether this program continues with the plan until it scheduled date in September 2016. This program is keen in ensuring that it dilutes any questioning of the market to enhance the quantitative easing program is fully implemented. This is considering the improved growth of the euro zone and the overall exit from deflation. This will ensure that it keeps any emerging pressure on the euro downwards together with the yields of the Euro bond. One of the main indicators of the inflation pressure is the producer prices.

The reason is that unless these prices are absorbed by retailers using profit margins which then translate to consumer prices. Thus, other the bond buying program that had been introduced by European Central Bank in March, other measures undertaken to boost the economy of Euro zone is cutting down main interest rate and the deposit rate. However, it is still too early to stay in the comfort zone about this issue. It is still early to indicate the trajectory of the future policy since inflation will continue depending on the prices of oil.

This is considering the weak euro area growth. Firstly, the dynamics of the oil prices continue to drive much of the inflation in 2015 mostly in the short term. In addition, despite the rise in May’s core inflation, more of the general momentum of inflation is likely to remain muted against an overall of still domestic demand of the euro area together with the capacity in the labor market. Considering that most of the policy maker (Morris 1) spent most of 2014 fearing the worsening of deflation, then the worry is that if the prices are entrenched, then the consumers and other businesses are likely to delay their purchases and investment expecting further fall in the prices expected.

Thus, there are unlikely dips into the level of deflation with oil prices diluting the risks of deflation. The overall weakness of the euro and the improved economic activity of the euro zone are other important factors in diluting the risk of deflation. Works Cited Morris, Jessica. Eurozone inflation beats expectations rising 0.3 per cent in May. 2 June 2015. .