When prices fall, a decrease in demand and investment can occur.
Such a situation can delay the economic growth of a country or region.
Signs of a possible economic downturn are spreading across Europe. That feeds investor concern. The technical recession already facing Germany could widen as data from the euro zone shows a larger-than-expected decline in inflation.
Inflation in the 20 countries of the euro zone slowed to 6.1% in May from 7% in April, below expectations of 6.3%. Although the European Central Bank (ECB) has been raising interest rates to rein in runaway prices, falling inflation could signal slower-than-expected economic growth.
A week ago, in CriptoNoticias, we reported on the technical recession in Germany, the largest economy in Europe. Now declining inflation and the debate over future ECB rate hikes are adding to concerns about a possible expansion of the recession in the eurozone.
The ECB has raised base rates a total of 375 basis points to 3.25% over the past year, and is expected to make another 25 basis point hike on June 15 due to underlying price pressures. However, the increasingly complicated economic scenario may alter these plans.
As this information portal analyzed last week, bitcoin (BTC) and risk markets could be affected if the recession spreads on a continental or global scale.
Why does the risk of recession increase if inflation falls?
To understand why a decline in inflation could increase the risk of a recession, it is important to first understand the relationship between inflation, interest rates, and economic growth.
Inflation is the general increase in prices in an economy over time. Inflation that is too high can be problematic, as it erodes the purchasing power of consumers and can lead to a spiral of ever higher prices.
On the other hand, if it comes to deflation, or a general decrease in prices, it can also be a problem for the general economy of a nation. When prices fall, consumers can put off their purchases with the expectation that prices will continue to fall. This delay in consumption can lead to a decrease in demand, which in turn can lead to a decrease in production and employment and, ultimately, an economic recession.
In any case, it is worth clarifying that what Europe is currently experiencing is not deflation, but a decrease in the inflation rate. This means that prices are still increasing overall, but at a slower rate. In this situation, called disinflation, prices still rise, but at a slower rate than before. Even so, if consumers and businesses expect inflation to continue to decline, they may delay their spending and investment decisionswhich in turn can further slow economic growth.