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Deflation Alarm in Spain Tests Lagarde’s Optimism on Prices

  • Madrid officials see threat of price trap in the euro area
  • ECB has so far insisted that inflation will recover next year
Hotel prices in Spain plunged as much as 60%.
Hotel prices in Spain plunged as much as 60%.Photographer: Josep Lago/AFP/Getty Images

When the coronavirus hit Europe this year, Manuel Vegas asked his Spanish association of hotel directors to avoid cutting room costs by more than 25%. Instead, they plunged as much as 60%, and he reckons “we won’t get back to 2019 prices until at least 2023.”

Falling prices can be found across the continent as economic restrictions and job insecurity deter spending. But in some quarters it’s the fear of steep and entrenched declines -- a deflationary trap that drags wages and ultimately brings the whole economy down -- that has people like Vegas worried most.