Inflation in Europe: plunging
Quite some economists have warned us for runaway inflation as a consequence of expansive monetary policies. They were more than a little wrong. The opposite is happening. Broad inflation has been below the 1,9% ECB inflation target for three and a half years now (for the record: the ECB-predictions of consumer price inflation were large and by right). And monetary policy was, when we look at the results (low-interest policies aim at an increase of private lending) in fact not expansive at all. At the same time I’m getting the idea that at this very moment inflation is plunging, again. Graph 1 shows ‘broad’ Eurozone and German GDP inflation up to the third quarter of 2012: low and stable after 2009. GDP-inflation does not only show the development of consumer prices but also those of for instance investment prices. There are however signs, in countries like Spain, Greece, France, Italy and the Netherlands, that inflation (excluding indirect taxes) is taking a new hit, which I consider to be ‘structural’, not a one or two quarter fluke. Graph 2, which contains information up to november, shows consumer price inflation in France.
Graph 1. ‘Broad’ inflation in the Eurozone and Germany
Graph 2. Consumer price inflation in France, ISJ is core inflation
This all means that there is more room as well as more necessity for expansive fiscal policies (like, among other measures, a much lower VAT rate on labour intensive services. Or restructuring Spanish and Irish mortgages).
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Real-World Economics Review Blog 
Deflationary policies yield low inflation. Surprise and disbelief.
Does the ECB target inflation as defined by the GDP deflator? Headline inflation is considerably higher than that, isn’t it?
The ECB does track a metric of consumer price inflation. And up to 2008 consumer price inflation developed in about the same way as the GDP deflator. Since 2008, however, the broader GDP deflator, which is a much better metric of price developments in the entire economy, shows lower growth than the consumer price index. We should go back to tracking the GDP deflator, just like De Nederlandsche Bank did in the times of Jelle Zijlstra and the Fed at least to an extent before about 1980. But not just this metric: money is used to pay for houses too, which, as Dean Baker states, are one of the most important markets in the economy. Just tracking cosumer price inflation is rather amateurish – until you discover, upon carefully reading people like Friedman and Lucas, that they do not really mind which metrick is used, as long as mechanically tracking a metric takes away discretionary power from the government and the central bank. Especially Friedman is very explicit about this, Lucas is always more hazy – but seems to have the same idea. Inflation targetting is in fact not about inflation at all – but about binding the government.
The “logic” of Friedman and his neoclassical friends is simple “trees make the wind blow”. “Inflation is always and everywhere a monetary phenomenon.”
“Always” means – 3000-5000 years ago? “Everywhere” means on Mars? This vision of economics as physics of society is absolutely wrong. Where laws created (not discovered) by mainstream economists, as laws of nature, must work always and everywhere. Some people would say that this is “non-scientific”. I would name it simply stupid. Why should stupid things be taught in universities under the name of science or economics?
Economics is full of such theories “trees make the wind blow”. Name at least two – wages and productivity, money and inflation. Even supply and demand theories are also from that kind.
Now, what harm caused such theories to real people. In 1990s in Russia Friedman policies to “fight” inflation with tight monetary policy had led to emergence of barter economy.
If “trees make the wind blow”, then to stop wind, you need to simply cut trees. Now, you don’t observe wind. Same thing with Russia – cut money to fight inflation. You don’t observe inflation statistically, because people barter. In the end of 20th century stupid ideas of Nobel prize “winner” brought people to misery and primitive barter economy.