Will the ECB take into account the risk of deflation that each investor has in mind today? It is on this question that the ECB is expected at its meeting this day.
So far, the central bank has not wanted to go in this game, indicating that inflation would remain low for a long time and the deflation risk would keep very low. This is about the last Draghi press conference. However this is only moderately reassuring because the expected inflation in 2016 is only 1.5 % well below the 2% target. In addition, despite the reassuring figures projections of the ECB, it cannot be excluded that, in the meantime, price change could tangent deflation.
In addition, a strong call from Draghi is desired because many statements caused confusion on the perception that may have European central bankers on this issue. On this point, everyone has retained what Jens Weidmann, the head of the Bundesbank, said on the risk of deflation and the possibility of dealing with it with a sort of QE .

What analysis can be done of the risk of deflation?
For me there are three elements to consider
1 – The Eurozone inflation figures suggest that the inflection up to 0.5 % in March is mainly due to raw materials momentum. This can be seen most directly by looking at inflation during the first quarter. In the first quarter of 2014 is very low and much lower than in the last three years. However, the evolution of the underlying index during the first quarter of 2014 is comparable to those observed in 2011, 2012 and 2013.
The underlying index is the only one on which the ECB could have a direct impact, then the analysis of the price index is not an argument to induce the ECB to take immediate action.

2 – However, the adjustment process in the Euro zone may push deflation. To return to growth, each country tries to gain competitiveness. Each want to cut costs and it is observed on labor costs. This creates the conditions for downward pressure on prices.
In addition, as the euro is “a little” expensive, competitiveness gains are partly crop when opportunities are outside the Euro zone. This can lead to excessive competition within the area. As competition is ensured by prices, it can have a deflationary effect.
3 – Expected growth in the Euro zone for the next few years is reduced. Pressures that may create tensions on production costs are seen as limited. The poor development of loans distributed in the Euro zone accentuates this phenomenon.
Therefore the absence of expected tensions and the adjustment mode, via a search competitiveness, could lead some countries to deflation and especially fuel expectations that may be self-fulfilling an inevitable deflation for the whole area.

To break these expectations the ECB must intervene. It must now take steps to fundamentally change expectations about price changes. The message will be eagerly awaited by investors that have very low inflation expectations even beyond the date 2016 mentioned by the ECB in its forecasts (inflation swaps to 5 years are a little over 1 %).
In other words, there is a nonzero risk today to see deflation in some countries and perhaps even for the entire Eurozone. Should we take this risk when all or almost all countries of the Euro zone are questioning their growth mode? Not sure that adding this particular risk helps to quickly find a sustained expansion.
The ECB must act to ensure price stability, which is its mandate, is respected. The inflation rate of 2% was defined as being compatible with a situation of stable and sustainable growth. If it is permanently lower or negative then might appear harmful risk to growth in the medium term. Not sure that we have need of it today.