September 30, 2014


Inflation expectations keep on falling

There is no good way to measure inflation expectations, and asking people directly often only reflects what they have just read in the newspaper – so the information becomes circular. With that caveat, the latest European Commission economic sentiment indicator gives a good reflection of a truncated economy recovery. It is best to ignore the numbers, especially the rather meaningless long-term averages. But what is notable is the gradual shift in consumer price expectations, which continues in September.


Note the indices were all lower in the middle of the 2009 recession – so this is clearly not a metric of long-term expectations (which we believe is essentially unmeasurable). The Wall Street Journal has a good article on how these indicators are drawn up.

In the real world what matters are the hard data. A flash estimate by the German statistics office shows HICP inflation unchanged at 0.8% in September. Reuters reports that the market expectations had been a little lower, so this number is, relatively, good news. Comparable Spanish data were -0.3% (flash estimate) in September after -0,5% in August. There is no fundamental change in the overall picture, but at least things have not been getting worse since August. The Reuters story also made a reference to a forecast by the Cologne Institute for Economic Research, which sees an average German annual inflation at 1.25% this year.

For Greece the latest economic indicators are heading downwards: the economic sentiment (ESI) decreased for the third successive month at an accelerating pace, falling to 99.3 in September from 102 in August, Macropolis quotes data from the European Commission. The September reading is the first below the 100-point mark since May. Since the peak of 104.1 posted in June, Greek ESI has lost almost 5 points. Consumer confidence also deteriorated for the third straight month, easing to -55.8 in September from -54.2 in August. The headline figure peaked to -47.7 in June recording a cumulative drop of 8 points thereafter. Both are still positive when taken over the year up to now, but if the trend continues this too will change.

We noted a story in La Repubblica this morning, in which Pier Carlo Padoan, apparently for the first time, publicly questioned the fiscal compact. The article did not quote him saying this directly, but he did say that austerity was not the right response, and the eurozone should pay closer attention to the policy mix at a time when inflation is too low.

Most articles on inflation point out that the ECB has more tools available, including QE. The German opposition to these policies is forming. Hans-Werner Sinn urges Angela Merkel, or failing that the Constitutional Court, to stop Mario Draghi’s ABS programme. Here is the core of his argument:

“By directly granting credit to the private sector the ECB will enter a far larger arena. Mr Draghi has said that, as a first step, he intends to expand the ECB’s balance sheet by €1tn. The end of the property boom has left many private borrowers in southern Europe close to bankruptcy. The ECB’s plan to purchase their debt could end up transferring dozens if not hundreds of billions of euros from eurozone taxpayers to the creditors of these hapless individuals and companies.”

He said the measures were too extreme, given the circumstances, as core inflation is still rising by 0.9%. He calls these policies a “fig leaf” to hide their true nature, a fiscal bailout, through which the ECB clearly oversteps its mandate. 

Our other stories

Our other stories are on the Spanish constitutional court’s temporary injunction against the Catalan referendum; on the French welfare budget, on the European Commission’s reaction to Ireland’s fiscal relaxation; on an important victory by Renzi against opponents from inside his own party; and on doubts about the AQR and the stress tests, and on Juncker’s €300bn investment scam.

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