Thursday 23 January 2020

Inflation not as complex as Draghi thought - ECB

Change at the top: Mario Draghi was ECB president until last year
Change at the top: Mario Draghi was ECB president until last year

Carolynn Look

Inflation in the euro area might not be as complex as former policymakers such as president Mario Draghi and executive board member Benoit Coeure have indicated, according to researchers at the European Central Bank (ECB).

The pair, who left late last year after eight-year terms that were dominated by the struggle to restore price stability, said while in office that structural changes in the economy such as digitalisation, globalisation and the expansion of the service sector were complicating inflation. Yet a paper published yesterday said traditional models still held.

Researchers have "suggested many possible factors" for supposedly "missing" inflation and disinflation since the global financial crisis, according to the paper's authors, Laurence Ball and Sandeep Mazumder, citing speeches by the former policymakers and work by other ECB economists. "European inflation behaviour is not as puzzling or complex as recent discussions suggest."

In traditional models, inflation accelerates or slows depending on the level of slack in the economy. A key metric is unemployment, which depresses wages and consequently the ability of households to pay higher prices.

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That relationship is known as the Phillips curve after the New Zealand economist William Phillips.

That model, which has guided monetary policy for decades, has been widely questioned as policymakers across advanced economies struggle with subdued prices and wages, even amid tight labour markets. In response, central banks have plunged into unconventional strategies, such as quantitative easing and negative interest rates.

In the paper, which does not necessarily reflect the ECB's official view, the researchers examined "core" price growth that strips out the effects of volatile components. Instead of using the eurozone's standard indicator, which excludes food and energy prices, they analysed the weighted median of all industries' inflation rates, arguing that it produces a less volatile gauge.

Under that measure, "a simple Phillips curve captures most of the movements in inflation over the 20 years the euro has existed", they said.

The research could be an important contribution to the ECB's upcoming strategy review under the direction of its new president, Christine Lagarde.

The wide-ranging assessment, the first since 2003, will address such weighty questions as whether the inflation goal needs to be changed.

Bloomberg

Irish Independent

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