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June 28, 2017

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Debate rages over whether deflation 'ogre' is real

PARIS -- Ultra-low inflation in the eurozone has sparked a divide among officials and analysts over whether the risk of deflation is a real "ogre" or just a phantom menace.

The head of the IMF, Christine Lagarde, warned this past week of the "rising risks" of deflation, which she called "the ogre that must be fought decisively."

"With inflation running below many central banks' targets, we see rising risks of deflation, which could prove disastrous for the recovery," Lagarde said.

Data released this past week showed that the annual inflation rate in the 18-nation eurozone dipped to 0.8 percent in December, considerably below the European Central Bank's target of just below 2.0 percent.

That masks large differences between countries, however.

While average inflation came in at 2.6 percent in the Netherlands in 2013, it was just 1.0 percent in France, the eurozone's second largest economy.

In crisis-hit Greece, prices actually fell by 0.9 percent on average over 2013, according to data from EU data agency Eurostat.

An extended period of deflation — falling prices in real terms — can encourage consumers to put off buying goods in the expectation that if they wait, they will become cheaper.

That in turn weakens the economy as companies reduce output accordingly, hitting employment and demand, thereby setting off a very damaging downward spiral.

'Rising risk' of the Deflation 'ogre'

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