Central bank goalposts are being shifted as their “low-flation” conundrum gets worse.
It wasn’t supposed to be like this. Faced with the prospect of price deflation a decade ago, central banks decided to embark on quantitative easing. Prices going down? Simple. Just create shed loads of new money and the problem will go away. Except, it hasn’t.
Price inflation measurements such as the Consumer Price Index (CPI) have failed to show any signs of vigor despite academic, economic eggheads’ assertions that they should. Globalization (Amazonization), demographics and the great technology revolution have all been blamed for the fact that wages have not risen much and, therefore, that prices haven’t either.
Now, according to a Bloomberg report, the European Central Bank is reviewing its “inflation targeting” policy whereby it seeks to maintain Eurozone CPI growth “below, but close to, 2%”. On the advice of outgoing president, Mario Draghi, the ECB is investigating whether it can have more “symmetry” around the 2% target. That’s code for saying that it wants to be able to see CPI growth above 2% without worrying about it. In doing this, the ECB is starting to push for more justification to continue with quantitative easing and, perhaps, even direct buying of equities that the Bank of Japan and the Swiss National Bank have been engaging in for years now. Even the U.S. Federal Reserve is conducting a review of its strategy vis-à-vis price inflation and its mandate. Those results are expected early next year.
This is a sign that central banks are starting to panic over the fact that, no matter what they do, price inflation remains stubbornly low and falling. The chart below shows that price inflation expectations in Germany have plummeted since the beginning of 2018 and this picture is repeated across the Eurozone and the U.S.
In classical economics, periods of falling prices were rarely mentioned and certainly not seen as a problem. Viewing price deflation as a problem is a distinctly neo-classical concept, and that is because it gives states a reason to continually increase borrowing and spending, expanding the reach of government in the process. In the next major downturn, that model will very likely be refuted.