Macroeconomics - A commentary on http://www.bbc.com/news/business-30243113 - Essay Example

Eurozone Inflation Eurozone Inflation Andrew Walker explains the rate of inflation rate in Europe and warns onthe dangers of the trend witness. The inflation rate in Eurozone has significantly dropped. This indicates that deflation still poses a major threat to the nations that belong to the zone. According to ECB inflation rate below a percentage is categorized as deflation. The implications of deflation are slow economic growth rate as well as increase in the rate of unemployment. The key indicates that correspond to deflation are the decrease in prices of commodities such as energy and food.

Germany has been the main culprit of the falling rates of inflation while interestingly, in Italy, the rate increased relatively.Germany inflation rate dropped to the lowest point never witness for five years (Andrew, 2014). Figure 1 Figure 2 The UK is to illustrate the concern of the ECB on the trend of inflation in in Europe. Figure 1 illustrates that from August 2007 to August 2008 the inflation rate rose from slightly below 2% to slightly above 5%. However, from August 2008 to August 2009, the rate decreased to 1%.

In addition, from August 2009 to November 2011, the rate increased intermittently to slightly above 5%. Interestingly, from 2011 to November 2014 the rate has tremendously decreased to below the 1% mark. The target inflation rate for the ECB has always been at 2%. In figure 2, the two graphs indicate the trend witness between the rate of unemployment and the rate of inflation from 2005 to 2012. From November to January 2005 to February to April 2008, the rate of unemployment and inflation rose.

Furthermore, the rate of unemployment exceeded the rate of inflation throughout that period. In February to April 2008, the rate of employment and that of inflation was equal. From February to April 2008 to August to October 2008, both the unemployment and inflation rates increased to 6%. During the period the inflation rate exceeded the unemployment rate. Again between August to October the rate of the two were equal. From that period to May-July 2012, the rates of both unemployment and increased with the rate of unemployment deviating farther away from that of inflation.

Analysis The trend witnessed in figure one can be accrued to several factors such as the low prices of energy. The prices of gas and electricityas well as other energy sources have been increasing at a faster rate. The theory behind inflation indicates that as prices of commodities rise so does the rate of inflation. The converse is also true (Tamara, 2012).Apparently, these factors are contributing to Europe experiencing deflation. In addition, the growth of wages has been significantly below the expectation.

Expert views that the deflation below 1% is catastrophic to economic growth since investors are normally cautious in investing in such situations. Perhaps, the fear of the investors has contributed to the increasing unemployment rate (Tamara, 2012). The theory behind the relationship between unemployment and inflation is best explained using the Philips curves. The argument behind the theory indicates that as the rate of unemployment decreases, employees of organizations tend to aggravate increase in their wages.

In turn, these organizations shift to consumers by increasing the prices of their goods or services when they have elevated the wages of their employees. This results in higher prices of goods and services offered by the organizations. The higher prices of commodities consequently results in the build up to the inflation of the economy.The ECB set target of 2% inflation rate is likely to solve the unemployment rate as well as the deflation concern. The best avenue of achieving this is by controlling the flow of money in the economy.

When the bank withdraws money out of the economy, the demand for the supply of that money increases. Conversely, when the supply is relatively increased, the demand is likely to decrease. When the concept is effectively applied, that target can be achieved (Tamara, 2012). References List Andrew, W. (2014). Eurozone Inflation Rate fall to 0.3%. Retrieved on 27th Feb 2015 from: http://www.bbc.com/news/business-30243113 Tamara, T.(2012).The Economic Dynamics of Inflation and Unemployment .Theoretical Economics Letters, 2, 133-140