Frankfurt: If the European Central Bank (ECB) has one monetary dragon it considers essential to slay, it is inflation.

Keeping inflation under control is the bank’s primary legal responsibility, and as Europe struggles to overcome an economic crisis caused by the sovereign debt crisis, inflation has remained its primary focus.

Central concern: ECB chief Jean-Claude Trichet. Bloomberg

But some economists say inflation has become a driving obsession that has blinded the bank to a potentially bigger threat to Europe: deflation.

The bank’s doubters grew louder after it made a big show of taking measures to cancel out the supposed inflationary impact of the government bond purchases it began on 10 May to help keep Greece and several other euro zone countries from defaulting on their debts.

“It’s nuts: How can they be concerned about the inflationary impact of this?" said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, New York. “If I were the head of the ECB, I would be printing money to avert the decline in the money supply."

Many economists regard deflation as more dangerous than inflation because it prompts consumers to delay purchases as they wait for lower prices, creating a downward spiral of lower demand and production. Deflation is also bad for debtors like Greece because they may have to pay back money that would be worth more than it was when they borrowed it.

Economists such as Weinberg—and a few policymakers as well—are beginning to worry that a deflationary spiral in Europe, similar to the one that strangled Japanese growth for most of the 1990s, is a bigger threat than inflation. Prices fell in Ireland in April; inflation was below 1% in five other euro zone countries. The problem also extends outside the euro zone.

“We all share some risks and problems in common with Japan circa 1995," Adam S. Posen, a member of the Bank of England’s monetary policy committee, said at the London School of Economics on 24 May. The US is also at risk, Posen said, though he rated the chances of deflation as low. But just as Japan did in the 1990s, ECB and the US Federal Reserve have cut interest rates close to zero while pumping huge amounts of credit into their economies. That means the two central banks would have limited policy tools left with which to combat a collapse in prices and demand.

The downward pressure on prices has its roots in the economic decline that followed the 2008 financial crisis, but Europe’s sovereign debt crisis is likely to add extra impetus. To mollify bond markets, governments, including those of Spain and Germany, are reducing spending sharply to lower their deficits, which will inevitably curb consumer demand and employment, hindering growth.

Inflation in the euro zone—the 16 countries that use the euro—rose slightly in April, to an annual rate of 1.5% from 1.4% in March. Declines in categories such as recreation and culture, communications and vacation tour packages blunted the impact of higher transportation costs. And so-called core inflation—which excludes energy prices and which most economists consider a better measure for policymaking purposes—declined to 0.7% in April from 0.8% in March. By either measure, the overall rate was still well below the central bank's target of about 2%.

The real challenge for policymakers will occur in the coming months and years as Spain, Greece and Portugal struggle to regain their competitiveness in international markets. Without their own currencies to devalue, they have little choice but to cut wages and keep them well below those in countries such as Germany and France. Pay cuts and lower government spending will put downward pressure on prices.

Spanish core inflation already turned negative in April.

A mild decline in prices in a few euro zone countries can be managed, economists say, but it will add to the risks of deflation. And the central bank will face more difficulty than usual crafting a monetary policy that fits both the ailing countries and the faster-growing economies like those of Germany and France.

“The ECB has a careful balancing act to do," said Dennis Snower, president of the Kiel Institute for the World Economy in Germany.

The bank has remained firm in its focus on containing inflation. Jean-Claude Trichet, the bank’s president, has said he considers inflation a tax on the poor. And the bank's charter obliges it to serve foremost as guardian of price stability.

Nevertheless, Trichet has been under fire, especially from critics in Germany, ever since the central bank began the unprecedented bond purchases to halt a sell-off of Greek, Portuguese and Spanish government debt.

By buying government bonds on the open market, and being coy about how much it was spending, the bank was able to reduce the high premiums investors were demanding for debt from the weakest countries. A continuation of the market rout would have raised the interest rates that Spain and other countries had to pay to sell new bonds, aggravating their already grave fiscal problems.

The problem was that, to buy the bonds, the bank had to expand the assets it held on its books. So to prove it had not stooped to printing money, the bank promised to offset the bond purchases, which totalled €26.5 billion ($32.6 billion as of 24 May, the most recent data available), by taking in a like amount in short-term deposits from banks. In effect, the bank siphoned off as much liquidity as it added.

The bond purchases were only the latest of a series of extraordinary moves Trichet has pursued to stabilize the European banking system. Since the beginning of the financial crisis, the central bank has been essentially keeping banks afloat by providing almost unlimited loans at 1% interest.

Trichet is eager to squash any doubts that such moves represent a shift in the bank’s focus on inflation, said Snower of the Kiel Institute. “The ECB is showing very clearly that its objectives have not changed."