Central bankers are warming us up for more inflation again

A feature of the credit crunch era is the repetition of various suggestions from governments and central banks. One example of this has been the issue of Eurobonds which invariably has a lifespan until the nearest German official spots it. Another has been the concept of central banks overshooting their inflation target for a while. It is something that is usually supported by those especially keen on ( even more) interest-rate cuts and monetary easing so let us take a look.

Last Wednesday European Central Bank President Mario Draghi appeared to join the fray and the emphasis is mine.

Well, on your second question I will answer saying exactly the same thing. We don’t tolerate too low inflation; we remain fully committed to using all necessary instruments to return inflation to 2% without undue delay. Likewise, our inflation aim doesn’t imply a ceiling of 2%. Inflation can deviate from our objective in both directions, so long as the path of inflation converges towards our medium-term objective. I believe I must have said something close to this, or something to this extent a few other times in the past few years.

Nice try Mario but not all pf us had our senses completely dulled by what was otherwise a going through the motions press conference. As what he said at the press conference last September was really rather different.

In relation to that: shouldn’t the ECB be aiming for an overshoot on inflation rather than an undershoot given that it’s been below target for so long?

Second point: our objective is an inflation rate which is below, but close to 2% over the medium term; we stay with that, that’s our objective.

As you can see back then he was clearly sign posting an inflation targeting system aiming for inflation below 2%. That was in line with the valedictory speech given by his predecessor Jean-Claude Trichet which gave us a pretty exact definition by the way he was so pleased with it averaging 1.97% per annum in his term. So we have seen a shift which leads to the question, why?

The actual situation

What makes the switch look rather odd is the actual inflation situation in the Euro area. Back to Mario at the ECB press conference on Wednesday.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4% in March 2019, after 1.5% in February, reflecting mainly a decline in food, services and non-energy industrial goods price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months.

So we find that inflation is below target and expected to fall further in 2019. This was a subject which was probed by one of the questions.

 It’s quite clear that the sliding of the five-year-to-five-year inflation expectations corresponds to a deterioration of the economic outlook. It’s also quite clear that as the economic outlook, especially the economic activity slows down, also markets expect less pressure in the labour market, but we haven’t seen that yet.

The issue of markets for inflation expectations is often misunderstood as the truth is we know so little about what inflation will be then. But such as it is again  the trend may well be lower so why have we been guided towards higher inflation being permitted.

It might have been a slip of the tongue but Mario Draghi is usually quite careful with his language. This leaves us with another thought, which is that if he is warming us up for an attitude change he is doing soon behalf of his successor as he departs to his retirement villa at the end of October.

The US

Minneapolis Fed President Neel Kashkari suggested this in his #AskNeel exercise on Twitter.

Well we officially have a symmetric target and actual inflation has averaged around 1.7%, below our 2% target, for the past several years. So if we were at 2.3% for several years that shouldn’t be concerning.

Also he reminded those observing the debate on Twitter that the US inflation target is symmetric and thus unlike the ECB.

Yes, i think we should really live the symmetric target and not tap the brakes prematurely. This is why I’ve been arguing for more accommodative monetary policy. But we are undertaking a year long review of various approaches so I am keeping an open mind.

As you can see with views like that the Donald is likely to be describing Neel Kashkari as “one of the best people”.  If we move to the detail there are various issues and my initial one is that inflation tends to feed on itself and be self-fulfilling so the idea that we can be just over the target at say 2.3% is far from telling the full picture. Usually iy would then go higher. Also if your wages were not growing or only growing at 1% you would be concerned about even that seemingly low-level of inflation.

If we consider the review the US Fed is undertaken we see from last week’s speech by Vice Chair Clarida a denial that it has any plans to change its 2% per annum target and we know what to do with those! Especially as he later points out this.

In part because of that concern, some economists have advocated “makeup” strategies under which policymakers seek to undo, in part or in whole, past inflation deviations from target. Such strategies include targeting average inflation over a multiyear period and price-level targeting, in which policymakers seek to stabilize the price level around a constant growth path.

As the credit crunch era has seen inflation generally be below target this would be quite a shift as it would allow for quite a catch-up. Which of course is exactly the point!


Central bankers fear that they are approaching something of a nexus point. They have deployed monetary policy on a scale that would not have been believed before the credit crunch hit us. Yet in spite of the negative interest-rates, QE style bond purchases and in some cases equity and property buys we see that there has been an economic slow down and inflation is generally below target. Also the country that has deployed monetary policy the most in terms of scale Japan has virtually no inflation at all ( 0.2% in February).

At each point in the crisis where central bankers face such issues they have found a way to ease policy again. We have seen various attempts at this and below is an example from Charles Evans the President of the Chicago Fed from back in March 2012.

My preferred inflation threshold is a forecast of 3 percent over the medium term.

We have seen others look for 4% per annum. What we are seeing now is another way of trying to get the same effect but this time looking backwards rather than forwards.

There are plenty of problems with this. Whilst a higher inflation target might make life easier for central bankers the ordinary worker and consumer faces what economists call “sticky” wages. Or in simple terms prices go up but wages may not and if the credit crunch is any guide will not. My country the UK suffered from that in 2010/11 when the Bank of England “looked through” consumer inflation which went above 5% with the consequence of real wages taking a sharp hit from which they have still to recover.

Next comes the issue that in the modern era 2% per annum may be too high as a target anyway. In spite of all the effort it has been mostly undershot and as 2% in itself has no reason for existence why not cut it? Then we might make progress in real wage terms or more realistically reduce the falls. That is before we get to the issue of inflation measures lacking credibility in the real world as things get more expensive but inflation is officially recorded as low.

Meanwhile central bankers sing along to Marvin Gaye.

‘Cause baby there ain’t no mountain high enough





13 thoughts on “Central bankers are warming us up for more inflation again

    • the plebs are too busy watching Game of Thrones to care , and that MSM do a really good job shouting ” SQUIRREL !!!” …….

      they’ll notice when its too late


  1. Oh yes, they’re winding themselves up for the inflation fest to rid us of this yoke of debt so that we can take on more down the road.In the US, the Fed has just done a tyre screeching 180 and admitted there are not only going to be no further rate hikes, but maybe(read definitely) rate cuts coming next, and also softening people expectations regarding QE in that it should maybe be used as a permanent policy tool rather than an emergency measure, all it would take for inflation to rip in the US is for the banks to start lending out a tiny proportion of the money parked on their balance sheets into the economy, rather than buy bonds and stocks as they have been for the last ten years, leverage that up by ten and you are talking serious inflation coming down the pipe.

    Over in the UK, as opposed to Japan who never seem to be able to tempt the inflation genie out of the bottle, as once it is out, it jumps straight back in, the Bank of England has a Sterling record of providing inflation in massive doses as anyone with a memory of the sixties, seventies and eighties will attest. It does inflation extremely well, almost effortlessly in comparison to Japan, and with Mark Carney at the helm, it is likely to be totally wild. The problem is in the previous periods of high inflation, unions were able to more or less keep up with it, but since the mid/late eighties I would attest that wages have been stagnant any growth since then has been as a result of more debt being taken on, and now unions are barely able to get even RPI for most of their members, so how exactly are they going to achieve the rises necessary to keep up with Carney’s printing presses? Quite simply they are not, stagflation here we come. Carney will be “looking through” it all the way until his retirement.

    • Hi Kevin

      Yes the QE era has not turned out as originally badged as the idea that it would generate consumer inflation has turned out to be patchy. In the UK it did initially and post the Sledgehammer QE in August 2016. But in the Euro area and the US we got less and in Japan the only real rise came from the Consumption Tax hike in 2014. Asset price inflation, of course has seen a different trend.

      Wage growth as I recall JW reminding us years ago is the problem. I fear like you that 3% inflation might be combined with 2% wage growth.

  2. I forgot to add that in Japans experiment with ZIRP and QE that started thirty years ago, they let property prices fall from their peak in 1990, can you see the Bank of England or any UK government allowing that to happen?

  3. Great blog and great podcast as usual, Shaun.
    Thank you for the reference to Clarida’s speech, which I took the time to read and found hugely disappointing, if it reflects the mindset of the Fed towards the review of its monetary policy framework. Clarida said: “The Federal Reserve has been charged by the Congress with a dual mandate to achieve maximum employment and price stability, and this review will take this mandate as given. Moreover, the review will take as given that a 2 percent rate of inflation in the price index for personal consumption expenditures (PCE) is the operational goal most consistent with our price stability mandate.” So it seems that most of the things any review worthy of the name would want to look at are out of bounds. Inflation nutters are wasting their breath calling for an end to the dual mandate or for a lower target inflation rate, and there is also no point in talking about dumping the PCEPI for a to-be-created consumer price series that would include housing prices. Improving core PCEPI measures would presumably be in scope but wasn’t discussed by Clarida. Unlike the Bank of England the US Fed does not have a target inflation range, with formal lower and upper bounds. One would think that this also would be a topic for discussion, but Clarida doesn’t mention it.
    The US Fed really shouldn’t waste a lot of time studying replacing an inflation target with a price level target. Price level targeting was studied to death by the Bank of Canada while Mark Carney was Governor, prior to the 2011 renewal of the inflation control agreement. Université Laval economics professor Stephen Gordon made the case against price level targeting very well at that time:

    As Gordon anticipated, there was no change to a price level targeting regime with the 2011 renewal agreement. Unfortunately the time frittered away on this issue meant there wasn’t sufficient research done on lowering the target rate of inflation. It set the Bank of Canada up for its unprecedented increase in the “true” inflation target rate with the 2016 renewal agreement.
    The US Fed really should rethink its priorities for this year’s review, asap.

    • Hi Andrew and thank you

      The mandate is outside the Fed’s control but to my mind the review is missing two major points
      1. What is its unemployment objective? For example the Charles Evans speech from 2012 I quoted made the same mistake as Mark Carney at the Bank of England in regarding a 7% unemployment rate as significant. In addition that is a long way behind the US now.
      2. How do the two objectives relate and which has primacy? We have figured it out on here but I think the ordinary American deserves to know.

      If we add in your points it makes me wonder what they are reviewing or more realistically what they want us to think they are reviewing? I am pleased to see Stephen Gordon rejecting price level targeting as some of his views were far from strong.

      “By any measure, the last twenty years of inflation targeting can only be considered an unqualified success: inflation has been low and stable for a generation……But the best reason for sticking with the inflation target is that after several decades of flailing about, the Bank of Canada has a policy framework that works well. We should think twice before trying to fix something that doesn’t appear to be broken.”

  4. Hello Shaun,

    So inflation in the CPI should be 3-4% , why ?

    if they used RPI they’d see they had that inflation like that…..

    Remember when the target was to get as close to zero as possible ( frankly the failure to do this with the Gerry-Mandered CPI is frankly astonishing ) ?


    • Hi Forbin

      In the future inflation will be zero, at least according to the official figures.

      More seriously ( I think) there is a gap in the US data too as the Fed targets PCE ( Personal Consumption Expenditure) inflation which tends to be about 0.5% lower than their CPI.

  5. Hi Shaun

    The central banks are in a bind; they want inflation to reduce the debt burden but can’t put up interest rates to control it as their mandates usually specify because this will correct the very thing they want.

    Draghi saying that he doesn’t tolerate low inflation sounds quite absurd, as if inflation was something to be desired by the man in the street, rather than reducing his standard of living. If inflation did start to go up there would be a marked reluctance to increase interest rates and an outbreak of “looking through”.

    I wonder how long it will be before Draghi and his central bank co workers come to see the charms of MMT when these measurs fail to gain traction. At the moment I’d say we were at about six on the desperation scale but that could go up quite markedly if the economic slowdown really takes hold and then the charms of MMT might be too much to resist.

    It’s all futile of course but King Canute would be proud of his disciples.

    • King Canute would be aghast that another courtier , Draghi, was extolling powers that no mortal has.. ( ie control over inflation )

      legend of King Canute and the tide, which usually misrepresents him as a deluded monarch believing he has supernatural powers, contrary to the original legend which portrays a wise king who rebuked his courtiers for their fawning behavior.


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