European Central Bank (ECB) President Mario Draghi may have skipped the US Federal Reserve’s Jackson Hole symposium this year, but he can not dodge its conclusion: Central banks can not steer inflation as well as they thought.
Less than six months into a stimulus program that Draghi promised would revive consumer-price growth, the euro area is facing renewed disinflationary pressure as China’s economy slows and commodity prices slump. Inflation failed to pick up this month, data showed yesterday and Draghi might have to downgrade the institution’s forecasts on Thursday.
The newest risk to prices highlights how in the 19-nation currency bloc — as in the US, the UK and other industrialized nations — headline inflation is still far below target even as the economy recovers. Whether that heightens calls for the ECB to step up its 1.1 trillion euro (US$1.2 trillion) quantitative-easing program is likely to depend on how Draghi communicates the complex economic picture.
“People think central banks don’t have a handle on inflation anymore and that’s not true,” Johns Hopkins University professor of economics Jon Faust said in an interview at the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming.
“Inflation will come back, but the specific timing of that is much more difficult in the current environment,” he said.
Euro-area consumer prices rose an annual 0.2 percent last month, unchanged from July, data from the EU’s statistics office showed yesterday. Economists surveyed by Bloomberg predicted a rate of 0.1 percent.
The ECB forecast in June that price gains would average 1.5 percent next year and 1.8 percent in 2017, provided its stimulus is implemented in full. That would mark a return to the goal of keeping inflation just under 2 percent over the medium term. Economic headwinds could make that outlook harder to achieve.
The ECB’s Governing Council is to convene in Frankfurt from tomorrow to set monetary policy and Draghi is to present the quarterly economic forecasts at a press conference on Thursday. Officials including Executive Board member Peter Praet, the ECB’s chief economist, said last week that they are ready to extend or expand quantitative easing if needed.
“The ECB staff macroeconomic projections are likely to show a downward revision in inflation forecasts for both this year and 2016, resulting from a stronger euro and weaker oil-price futures,” Barclays PLC chief European economist Philippe Gudin said in a note to clients on Friday.
“We now expect further easing to be announced before year-end,” he wrote.
Central bankers have an opportunity to discuss their predicament again starting on Friday, when they and finance ministers from the G20 nations gather for a two-day meeting in Ankara.
At Jackson Hole, academics effectively delivered a beating to central banks’ confidence in their ability to predict and manage their key variables, by pointing out wide gaps in knowledge about how inflation works.
Harvard University’s Gita Gopinath argued that the relationship between prices and exchange rates is not well understood.
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