It is fascinating how much blogging mileage one can get out of the incompetence of the ECB. Call this act 3 in my ongoing series on the delusions of central bankers and one size fits none monetary policy. Or maybe we all just got stuck in a Groundhog Day like world of monetary policy hell.
Scott Sumners links us to The Economist’s Buttonwood, where we find an article on the continuingly low – much too low – level of inflation in many countries around the world, but particularly in the eurozone. Apparently the inflation rate in October fell to a new 4-year low of just 0.7 percent. Obviously this is also absolutely catastrophic from a rebalancing point of view, as nicely described by Max back in his post on eurozone inflation arithmetic. But let as take a look at the Economist article for a second here.
Buttonwood writes that
There is much speculation now that the ECB will have to ease monetary policy further.
which, unfortunately, does not make any sense since it follows the long-refuted but obviously still very much alive notion that low interest rates mean easy money. In a better world, that statement would read “There is much speculation now that the ECB will finally move away from its ultra-tight monetary policy”. Let’s keep the dream alive. Further, we have
Lower commodity prices have helped; energy prices in the euro zone are down 1.7% year-on-year while food prices are rising only 1.9%, compared with 2.6% a year ago. But core inflation is also lower; it is only 0.8% in the euro zone.
Which is not really a problematic statement in and of itself but is besides the point. The ECB uses the harmonized index of consumer prices (HICP) as the variable it targets, yet it shouldn’t, since core inflation is a much better measure to target. Then again, that’s not looking much different in this particular case.
What does all this mean? It seems likely that central banks will maintain their very loose monetary policy; they can justifiably claim that, with inflation under control, they can focus on unemployment.
Again, the usual “low interest rates = easy money” fallacy, followed up by what would seem to be a clearly wrong statement. Inflation around the world is not under control. It is much too low! Not only is particularly the ECB failing to do its job, it is failing to do so spectacularly and apparently totally on purpose – not only in terms of what it should be doing ideally, but even in terms of what it should be doing to achieve its already too narrow target! And remember, unlike the FED, the ECB does not even yet have the zero lower bound problem, so it has even less of an excuse. As a last bit:
For governments, lower inflation seems like good news but it also means, that despite the rebound in eurozone economies, nominal GDP is still not growing very fast.
Which is another sentence that I unfortunately do not understand. What is the theory that states that lower inflation would seem like good news for governments? Last time I checked, inflation is a source of revenue for governments, and even if it weren’t, the current level of inflation is one of the main reasons many economies particularly in the eurozone remain depressed, and with them all the other revenue sources of governments. Which, I guess, is what the second part of the statement attempts to say.