Mario Draghi has left little doubt that he’s not ready to accept euro-area inflation has truly returned, and a closer look at data from the 19-nation region helps explain his hesitation.
The European Central Bank president will probably reiterate his assessment on Thursday that underlying price growth remains subdued even after inflation accelerated to 2 percent -- nominally above the institution’s goal. A hefty upgrade of near-term projections as flagged by Bundesbank President Jens Weidmann is unlikely to change that message.
At the heart of the debate is the question whether the latest pickup meets Draghi’s criteria of being broad-based, durable, self-sustained and stable over the medium term. In general, the answer is no.
Policy makers have zoomed in on core inflation -- the measure that excludes volatile components such as food and energy -- to justify record-low interest rates and a 2.28 trillion euro ($2.4 trillion) asset-purchase program that is currently set to run until at least December. The rate remains stuck below 1 percent, but what’s worse is that the trend has consistently pointed down in the euro’s 18-year history, suggesting structural weaknesses may be at play.
Years of crises and below-potential growth have left resources idle and unemployment close to 10 percent. Goods and services inflation, components contributing to the core rate, show few signs of picking up.
Inflation expectations are receding. After policy makers’ preferred gauge of future price developments approached levels of below but close to 2 percent at the end of last year -- signaling the ECB’s goal was in sight -- it’s now on the wane once more.
Some three-quarters of euro-area countries have seen rates accelerating above 1.5 percent in January, the last month for which final data are available.
But annual price gains, driven mostly by the impact of a slump in oil in 2015 and a surge last year, will fizzle out toward the end of this year. Divergence between individual euro-area countries. Inflation stood at 0.2 percent in Ireland and 3.1 percent in Belgium in January, is also proving challenging, according to former Bank of England Governor Mervyn King.
“The European Central Bank undoubtedly has the most difficult job,” he told Bloomberg Television in an interview on Tuesday. “It’s struggling to impose the same monetary policy on a group of countries that self-evidently need quite different monetary policies.”
Bloomberg
Read more:
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.