The ECB Ignores Inflation For Now

The Financial Times notes in a story today,”Credit squeeze pushes ECB to peg rates,” that the European Central Bank refrained from its inclination to increase rates to combat increasing inflation. One has to wonder whether the failure to increase rates is out of the recognition that a hike would put more downward pressure on the dollar. Similarly, the ECB may hope that the high euro in and of itself will moderate growth and provide some price relief.

From the Financial Times:

The credit turbulence that began in the US mortgage market put European policymakers on the spot on Thursday as the European Central Bank all but dropped plans for an interest rate rise and the Bank of England decided to leave its main rate unchanged.

Speaking after the ECB held its main interest rate at 4 per cent at a meeting in Vienna, Jean-Claude Trichet, president, went further in stressing the downside risks to growth in the eurozone.

Although the ECB would not let up in the battle against inflation, significant changes in the wording of Mr Trichet’s statement hinted strongly that the central bank saw little case for further rises in borrowing costs. Before the credit squeeze, the ECB had been planning to raise interest rates last month…..

Economists believe increasingly that UK and eurozone interest rates have peaked, after a series of tightening moves in the past year. The chances of an early cut in the UK were growing, analysts said.

Financial markets have also started talking about a fall in eurozone borrowing costs next year. But Holger Schmieding, economist at Bank of America, said: “It would probably take a dramatic, protracted and wholly unexpected downturn in the economic data to trigger any rate cut discussion in Frankfurt.”

The ECB’s task has been complicated because inflation in the 13-country region has started to rise and is expected to stay above its target of an annual rate “below but close” to 2 per cent well into next year. But recent economic data have also pointed to a marked slowdown in economic growth, almost certainly exacerbated by the global credit squeeze and a stronger euro.

Barry Ritholtz, ever vigilant for signs of “inflation ex inflation” had a different take on Trichet’s remarks:

But what really caught my was what Jean-Claude Trichet, President of the ECB, had to say about “core” inflation:

As regards price developments, according to Eurostat’s flash estimate, the annual HICP inflation rate increased strongly to 2.1% in September 2007, from 1.7% in August. As we have already indicated on previous occasions, we are now entering a period during which unfavourable effects from energy prices will have a strong impact on annual HICP inflation rates. Owing mainly to such effects, as a result of the marked decline in energy prices a year ago combined with the recent substantial increase in oil prices, we expect the inflation rate to remain significantly above 2% in the remaining months of 2007 and in early 2008, before moderating again. Largely as a consequence of capacity constraints and relatively tight labour market conditions, inflation is expected to be around 2% on average in 2008.

Risks to the outlook for price developments remain on the upside. They continue to include the possibility of further increases in the prices of oil and agricultural products as well as additional increases in administered prices and indirect taxes beyond those announced thus far. Taking into account the existence of capacity constraints, the favourable momentum of real GDP growth observed over the past few quarters and the positive signs from labour markets, stronger than currently expected wage developments may occur, and an increase in the pricing power in market segments with low competition could materialise. Such developments would pose upward risks to price stability. It is therefore crucial that all parties concerned meet their responsibilities. (emphasis added)

In other words, the non-core inflation level is rising, its significant, and its a threat to price stability. Focus too much on the Core to your own economy’s detriment . . .

The Prudent Investor also noted that Eurozone inflation, at 2.1%, is above the 2% target.

The Prudent Investor, now in Vienna, is suffering from personal inflation well in excess of the ECB’s published rates. Note these increases all took place since April:

City parking fees rose 50%.
Public local transport rose 13.3%.
Bread costs now 3 Euros for half a kilo, roughly 1,200% more than when I started monitoring bread prices 35 years ago (and 10plus percent only in 2007.)
Pizza in my favourite place rose 14.9%.
Gasoline costs about 20% more.
Milk and milk products rose around 15%.
Butter rose 25%.

Now imagine if you annualized those rates….

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One comment

  1. Laurent GUERBY

    There is a simple solution to the inflation measurement credibility problem: require statistical agencies to publish raw price data since it costs nothing now with the internet to publish even millions of monthly prices.

    In France there’s no legal barrier to doing so but economists invent stories when you ask them to publish the data, read here (in french).

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