{
  "title": "Disinflation in EU Countries outside the Eurozone",
  "publication": "IMF Blog, February 2, 2015",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2015/02/02/disinflation-in-eu-countries-outside-the-eurozone",
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  "summary": "Authors: Plamen Iossifov, Jiri Podpiera",
  "sections": [
    {
      "heading": "Overview and context",
      "content": "- Authors: Plamen Iossifov, Jiri Podpiera\n- Date: February 2, 2015\n- Key observation: Inflation has been falling sharply across Europe since 2012.\n- Affected groups:\n  - Countries pegging currencies to the euro: Bulgaria, Croatia, Lithuania (adopted the euro on January 1, 2015).\n  - Inflation targeters experiencing declines: Czech Republic, Hungary, Poland, Romania.\n- Related IMF commentary: Risks from low inflation in the euro area discussed in the March 2014 iMFdirect post."
    },
    {
      "heading": "Drivers of disinflationary dynamics",
      "content": "- Primary drivers:\n  - Falling world food and energy prices.\n  - Cuts in administered prices of energy where relevant.\n- Core inflation trends:\n  - Core inflation (excluding food and energy) has drifted down, tracing euro area price trends and diverging from the rest of the world.\n  - Suggests disinflationary spillovers from the euro area via close trade links.\n- Findings from IMF Working Paper (Iossifov and Podpiera, 2014):\n  - Falling world food and energy prices and related cuts in administered prices account for the largest share of the inflation decline in non-euro area EU countries in Central and Eastern Europe.\n  - Falling euro area core inflation spills over through lower prices of imports to countries with currencies pegged to the euro and, to a smaller extent, to inflation targeters with higher foreign value-added content in domestic demand.\n  - The domestic economic cycle (measured by the unemployment gap) has had a marginal impact in the recent disinflationary episode.\n  - The nominal effective exchange rate has been proportionately more important in inflation targeters."
    },
    {
      "heading": "Short-term benefits vs. medium-term risks",
      "content": "- Short-run gains from lower oil and energy prices:\n  - Lower energy prices boost purchasing power of households and businesses.\n  - With still negative output gaps throughout the region, a pick-up in demand would benefit domestic producers.\n  - Lower outlays ease liquidity strains of debt service for heavily indebted firms and households, reducing default risk and related negative effects on consumption and investment.\n- Medium-term costs and risks:\n  - Risk of “second-round” disinflationary effects that can be difficult to reverse, increasing debt sustainability risks.\n  - Falling prices could suppress domestic demand if households and firms revise down wage and profit expectations and cut consumption and investment, potentially triggering a self-feeding deflationary trap.\n  - Persistent disinflation/deflation can complicate deleveraging by increasing the real debt burden, exacerbated if stagnating nominal incomes are not offset by lower nominal interest rates passing through to debt servicing costs."
    },
    {
      "heading": "Near-term outlook and projections",
      "content": "- With rapidly falling world oil prices, disinflation pressures are unlikely to abate soon.\n- According to the latest WEO forecasts and IMF estimates:\n  - Headline inflation is expected to stay low through 2015 in euro peggers.\n  - Headline inflation is expected to remain below targets in Hungary, Poland, and Sweden.\n- The sharp decline in oil prices since June 2014 will continue to drag inflation lower as the commodity price drop filters through to domestic prices."
    },
    {
      "heading": "Policy implications and options",
      "content": "- Constraints and considerations:\n  - Countries pegged to the euro lack independent monetary policy and must rely on the ECB’s quantitative easing (QE) response to persistently low euro-area inflation.\n  - Where fiscal space allows, fiscal policy can be used to stimulate demand.\n  - Inflation-targeting central banks should aim to bring inflation closer to target and prevent “second-round” disinflationary effects.\n  - Policy instruments are at historical lows or at the zero lower bound, complicating further easing.\n  - Further monetary easing must weigh benefits of normalizing price pressures against risks to financial stability and capital flows (and hence exchange rates).\n  - Easing too much may prompt capital outflows; while outflows can help depreciate exchange rates and raise inflation, there is a risk the process may go too far—especially for countries with high shares of debt in foreign currencies.\n  - These countries are more exposed to changing investor risk appetite, geopolitical concerns, and global financing conditions.\n  - The recently announced QE by the ECB opens additional space for monetary easing by inflation-targeting central banks outside the eurozone.\n- Overall policy assessment:\n  - The greater concern at present appears to be very low inflation and the possibility of sliding into a deflationary trap rather than financial instability from capital outflows.\n  - Policymakers need to keep a watchful eye on markets while focusing on preventing second-round disinflationary effects.\n\nSource: Disinflation in EU Countries outside the Eurozone — Plamen Iossifov, Jiri Podpiera (February 2, 2015).\n\n---\n\n\n References\n\n- iMFdirect\n- https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-charts-1-2.jpg\n- https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-3.jpg\n- https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-4.jpg\n- IMF Working Paper\n- https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-5.jpg\n- WEO forecasts\n\nSource: https://www.imf.org/en/blogs/articles/2015/02/02/disinflation-in-eu-countries-outside-the-eurozone"
    }
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    "[Markdown version](/en/blogs/articles/2015/02/02/disinflation-in-eu-countries-outside-the-eurozone/index.md)",
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    "Authors: Plamen Iossifov, Jiri Podpiera",
    "Published: February 2, 2015",
    "Authors: Plamen Iossifov, Jiri Podpiera",
    "Date: February 2, 2015",
    "Key observation: Inflation has been falling sharply across Europe since 2012.",
    "Affected groups:",
    "Related IMF commentary: Risks from low inflation in the euro area discussed in the March 2014 iMFdirect post.",
    "Primary drivers:",
    "Core inflation trends:",
    "Findings from IMF Working Paper (Iossifov and Podpiera, 2014):",
    "Short-run gains from lower oil and energy prices:",
    "Medium-term costs and risks:",
    "With rapidly falling world oil prices, disinflation pressures are unlikely to abate soon.",
    "According to the latest WEO forecasts and IMF estimates:",
    "The sharp decline in oil prices since June 2014 will continue to drag inflation lower as the commodity price drop filters through to domestic prices.",
    "Constraints and considerations:",
    "Overall policy assessment:",
    "[iMFdirect](http://blogs.imf.org/2014/03/04/euro-area-deflation-versus-lowflation/)",
    "[https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-charts-1-2.jpg](https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-charts-1-2.jpg)",
    "[https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-3.jpg](https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-3.jpg)",
    "[https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-4.jpg](https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-4.jpg)",
    "[IMF Working Paper](http://www.imf.org/external/pubs/cat/longres.aspx?sk=42411.0)",
    "[https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-5.jpg](https://www.imf.org/wp-content/uploads/2015/01/eur-disinflation-chart-5.jpg)",
    "[WEO forecasts](http://www.imf.org/external/pubs/ft/weo/2014/02/)"
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