It’s too low.

There are two reasons moderate inflation is actually a good thing for modern economies — one involving demand, one involving supply.

On the demand side, inflation reduces the problem of the zero lower bound: nominal interest rates can’t go negative, but real rates can to the extent that modest inflation is embedded in expectations.

On the supply side, inflation reduces the problem of downward nominal wage rigidity: people are very reluctant to demand or accept actual wage cuts, which becomes a serious constraint if the relative wages of large groups of workers “need” to fall.

Both problems are very much present in the United States, but they’re even worse in the euro area, where fiscal policy has been highly contractionary thanks to savage forced austerity in the periphery and precautionary austerity in the core, so that monetary policy is the only game in town; and where those peripheral economies also need large internal devaluation.

Given this, Europe’s latest inflation numbers (pdf) are just disastrous: core inflation over the past year of just 0.8 percent.

Alas, European officials think that because the ECB has calmed financial markets and some countries are showing slight growth the crisis is over.