ECB and Inflation

[The Minsky Moment]

Imagine inflation in the Eurozone was measured at 6 percent.  That would be 3 times the 2 percent target rate for the ECB.
Panic and hysteria would reign.  German police would draghi out Mario and put him in the stocks.

In fact inflation is now measured at 0.7%, or a little over 1/3 of the target rate.
Yet the expectation is that the the ECB will do nothing.  Forget about going full Abe, the rumor is that Draghi won't even budge on conventional rate policy.
Far from there being outrage, eurozone policymakers seem perfectly content about this.

I've come to the conclusion that the euro is not inherently flawed.  It can be made to work.  It is just that those entrusted with the power to make it work elect to do otherwise.

[Zanza]

I don't get that either. Seems to be a golden opportunity to print a trillion Euro or two and cancel some of the bad debt that is dragging the financial sector and governments down.

[Sheilbh]

In Spain it's 0.3% and Italy's on 0.7% but looks like it'll decline. It's hard to see how those countries can avoid deflation, by the policies the Eurozone's followed. It's also tough to see how long that can be sustained politically.

[The Minsky Moment]

It's also tough to see how long that can be sustained politically.

Unemployment in the zone is at 12.2% and is projected to be the same in 2014.  There just doesn't seem to be a level of urgency in the political class equal to the extent of the problem.
The theoretical justification for pursuing fiscal austerity in the teeth of a recession is that you can compensate with monetary offset.  But that obviously doesn't work if the monetary authority sits on its hands.  There is no mainstream school of economics that supports the notion that one can simultaneously pursue fiscal contraction and hawkish monetary policy in a recession and have a good outcome.  It is as if the entire EZ has become raving Austrian School acolytes.

[Sheilbh]

Unemployment in the zone is at 12.2% and is projected to be the same in 2014.  There just doesn't seem to be a level of urgency in the political class equal to the extent of the problem.

But political power isn't in the Eurozone - it might be working better if it were. Instead there's a number of countries (most of them running primary surpluses) suffering and that's where the political pressure will be. As I say I can't see it being sustainable for several years.

[Admiral Yi]

US inflation is 2% but monetary policy here can hardly be described as contractionary.

[crazy canuck]

After all those years of high inflation many of us have been conditioned to think low inflation =  good.   It will probably take years of low inflation for us to realize that is not necessarily true.

[The Minsky Moment]

US inflation is 2% but monetary policy here can hardly be described as contractionary.

Scott Sumner might beg to differ.  (ex: http://www.themoneyillusion.com/?p=24378)  And I think he has a point.
What looks like is happening in the US is a monetary offset effort as the Fed moves to counteract the sequester.  But it still may be too conservative.  The Fed has increased the monetary base by about 25% over the course of the year, but compare Japan where Kuroda is targeting a doubling the base. 

[Admiral Yi]

"Not as expansionary as I'd like" and contractionary are not synonyms Joan.

[The Minsky Moment]

"Not as expansionary as I'd like" and contractionary are not synonyms Joan.

It's either/or.
If policy is insufficiently expansive, then it is too tight.

[Iormlund]

In Spain it's 0.3% and Italy's on 0.7% but looks like it'll decline. It's hard to see how those countries can avoid deflation, by the policies the Eurozone's followed. It's also tough to see how long that can be sustained politically.

Those figures are bollocks. If you factor taxes in both countries (and quite a few more) have been in deflation for a while.

[Admiral Yi]

How do you factor taxes into inflation Iormlund?

[Ideologue]

It is as if the entire EZ has become raving Austrian School acolytes.

Hasn't that been the case for, like, five years?

[Ideologue]

How do you factor taxes into inflation Iormlund?

I assumed he meant when you got rid of VAT, the scourge of Europe, prices would actually have dropped.

I would also assume that the statistics would account for that, but he does live there.  Of course deflation is pretty much what you would expect when two-thirds/three-quarters of your country is destitute.

[PJL]

Looks like the ECB has decided to cut interest rates after all, to 0.25%.