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).