The rise in prices in the euro zone continues its slow decline. From more than 10% last fall, driven by the raw materials crisis caused by the war in Ukraine, inflation has slowly fallen to around 5%. It is now stagnating in these waters, with 5.3% in July and August 2023, compared to 5.5% in June.
But why is the ECB so keen on this 2% threshold? The answer lies in economic science: inflation that is too high would undermine the purchasing power of households, and therefore consumption, too significantly. In order to curb this rise in prices, banks could raise interest rates, further reducing borrowing capacity and therefore investments. Conversely, prices that are too low would pose the risk of a drop in demand and debt repayment capacity. It can lead to a deflationary spiral with a further fall in prices, giving rise to a decline in investment and consumption and, ultimately, of growth. What appears attractive in the short term – an increase in purchasing power – is therefore destructive in the medium term.
The optimum of 2% is therefore considered by the ECB, but also by the American Federal Reserve, as a compromise between maintaining price stability, in order to protect household consumption and business investments, and ideal conditions for economic growth.