Don’t worry about price deflation

George Kessarios

George Kessarios
Chief Economist & Fund Manager

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Analyst Insights, Monday, 17th of August, 2020

With the Euro rising about 10% vs the Dollar recently, there are those who are raising the deflation flags, saying that any further rise on the Euro will be of concern.

The truth is I never understood the price deflation argument. By this, I mean goods and services costing less year over year. I dare to say that this is the reason why living standards have rose by so much in western countries over the past 100 years.

The truth is that the market does not bother or care about goods and services deflation whenever it happens. What the market fears are asset deflation, which is something different than ordinary price deflation. However, asset deflation at the current time is not an issue. More or less most assets are either up or inflating, and thus debt that is backed by such assets is not a concern for the banking system at this time.

And as long as central bank balance sheets keep rising, asset deflation is not a concern. As for ordinary services and goods deflation as a result of a higher Euro, that was never a concern, to begin with, and if fact will do more good than harm.

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