Inflation: targets and caricatures

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Inflation

Inflation: targets and caricatures

Inflation in the Euro area is still significantly lower than the European Central Bank’s target of just under two percent. The ECB follows perhaps the wrong goal?

The Treaty on the functioning of the European Union describes the role of the European Central Bank: “the Primary objective is to ensure price stability,” it says in article 282.

But what is price stability? The ECB defines as Inflation of below, but close to, two percent. A similar objective pursued already, the German Bundesbank before the Euro changeover 1.75 percent anpeilte. Other major Central banks, such as in the USA or the UK, have a Two-percent target.

Zero, one, two?

Ultimately, is it doesn’t matter “whether you are two or 1.5 per cent,” says Kai Carstensen, Professor of Econometrics at the University of Kiel. “You just want a little distance to the Zero line.” Because of falling prices should be avoided, because Deflation in the monetary policy as a dangerous is regarded as Inflation. Then earn companies less, make back investments and lay off employees, while the debts stay the same.

But that there is at all a reliable inflation target, is extremely important for long-term planning. Unions Orient themselves in wage negotiations on inflation targeting, such as investors and lenders. Just because all of the long-term goal of faith, give it to States, companies and households at all of the possibility of long-term fixed interest rates to blame, says Carstensen in the DW interview.

“If the ECB now says: We will reach our target and change it, therefore, creates uncertainty,” says Carstensen. “What is it that makes the Bank the next Time, if Inflation rises again? Answered you then your goal on the three, four or five percent?” Because of this uncertainty, have it in Spain or Greece before the introduction of the Euro, no cheap long-term loans given.

Makes the ECB is “ridiculous”?

The ECB justifies with the currently low Inflation their extremely loose monetary policy. She has the interest rates to almost Zero and are pumping in addition, each month 60 billion euros into the markets by you to purchase bonds. All of the drives, in theory, the Inflation in the height. However, the measures fizzle, Inflation remains low.

Better Oil to buy? ECB chief Draghi

This is due mainly to low Oil prices, says Carsten Brzeski, chief economist of the Bank ING-DiBa. The Central Bank should therefore be Inflation somewhere between zero and two percent “just accept”, otherwise, the course you take the risk, “ridiculous”. “Everyone knows that the ECB oil prices could not affect it unless it starts, oil barrels to buy.”

In essence, it was, therefore, not to Inflation but to the attempt of the ECB, the economic situation in the Euro zone to stimulate. “For me, the ECB, the low inflation rates are used, their extremely loose monetary policy, to sell – not only externally, but also internally,” says Brzeski in a DW interview.

Selling points

The reference to the missed inflation target had become “fantastic adequate”, to the consent of the German representative in the ECB governing Council to ensure that a loose monetary policy very were reluctant.

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The Anleihekaufprogramm the ECB provides more than a thousand billion euros in the market to rinse. This should help credit conditions for entrepreneurs and consumers to improve, especially in the crisis States of the Union. If the back to invest and consume, so the calculus, also attracts the economy picks back up again. At the same time, a weaker Euro, the export opportunities of European companies improve.

But the success has yet to be implemented, also due to the high debt and the weak economy. What entrepreneur borrows money for investment when he does not expect that its products sell?

Limitations of monetary policy

Nevertheless, calls ECB chief Mario Draghi is always on the fight against the low Inflation and the specter of Deflation, because only this argument is, by his mandate covered, to ensure price stability. “The ECB needs an Argument,” says Brzeski, “you can not say Yes, we do actually only to bring the Euro to weaken or the countries in southern Europe more time to buy. That would be not so good.”

In the discussion on the proper inflation target so it goes really to the question, how much clearance to the ECB for a policy is granted, that is not their main task. Draghi appeals regularly to the countries in the Euro area, the amount of time he gives, for structural reforms and the improvement of their competitiveness. The process goes on, if at all, only very slowly.

But what if Draghi the markets with money floods would? Probably would have to the crisis countries of the Euro area, then such high interest rates for their sovereign debt numbers that the Euro area would explode. Similar threatened as early as 2012, before Draghi promised “everything Necessary” to save the Euro.