‘Young middle class lose out most from deflation’
FRANKFURT, September 25, 2015
Young middle class people who borrow to buy homes stand to lose out most from falling prices, a study published by the European Central Bank found on Friday, when tracking the impact of deflation on the burden of debt.
Falling prices have become a threat to the 19-country euro zone as inflation has slowed to a virtual halt. A price dip could hurt the economy further if consumers delayed shopping in the hope that cars, for instance, will get cheaper still.
On Friday, the ECB published research showing another consequence of such a fall in prices - the uneven impact on the wealth of people and countries, depending in part on how much they have borrowed.
"Surprise inflation or deflation give rise to wealth redistribution," the report's authors wrote.
Falling prices make the burden of debt heavier as it becomes harder over time to repay the nominal amount, as money effectively loses its value and wages slow. Those who have lent, however, see the opposite.
The report singled out young households as particularly vulnerable, while richer people, with less debt, were the winners.
"Older and richer households ... tend to be the predominant winners of unexpected deflation, while young middle class households, which tend to borrow to purchase homes, tend to be the predominant losers," the report said.
The study pointed to Greece, Italy, Portugal and Spain as the 'largest net losers' from a price dip, while Belgium, on the other hand, gained.
The ECB is printing tens of billions of euros each month, buying chiefly government bonds, to buoy prices. But the impact of the buying programme has been blunted by a sharp fall in the price of oil. - Reuters
