Low and declining Eurozone inflation – time to act.

Some say that some say that inflation is ruled by ‘anchored expectations‘ (check i.e. the work of Thomas Sargent on this). Some also say that it is ruled by unemployment, which (to an extent and in a non-linear and when changes become negative even discontinuous way) rules the most important price in our economy: the wage level. All I know is that the ECB has been undershooting it’s 1,8% medium term target (i.e. a five to eight year average of consumer price inflation) for quite some years by now. By the way, the eclectic short-term inflation forecasts of the ECB have been reasonably reliable – and at present these predict more undershooting. The takeaway is of course that the ECB not only has room for much more aggressive monetary policies but that, as it is undershooting its target, because of the historically totally extreme levels of unemployment and its mandate as stipulated in the Eurozone treaties *has* to pursue such policies. The graph shows domestic demand inflation, which also includes investments and government consumption, instead of consumer price inflation as domestic demand covers much more prices and transactions.