Friday, 22 January 2016

The ECB’s three-step guide to gauging disinflation pressures

In World Economy News 22/01/2016

The European Central Bank does not “look through” the disinflationary price pressure from tumbling oil prices by focusing on core inflation but instead studies its impact from three angles, ECB President Mario Draghi said.
The persistence, size and trickle-down effect of these price moves are its guides, he said.
With euro zone inflation running at just 0.2 percent, versus the ECB’s target of close to 2 percent, the ECB has adopted an ultra-loose policy of buying assets, charging banks for depositing money with it, and keeping interest rates at rock bottom.
But oil prices – which have fallen more than 25 percent since the start of the year – are making it particularly difficult to revive inflation. Draghi went on to describe how the central bank is studying this phenomenon.
“We look at basically three factors. The first is the persistence of (price) changes. It’s quite clear that if it were to be a short-term effect … we would look through. That’s not been our experience over the last two years at least,” he said.
Secondly, Draghi said the ECB looks at what he called “materiality” – basically, the size of moves. These have been big. Indeed, he noted that the ECB’s December projections were based on crude oil prices averaging $52.2 this year, but Brent crude is now trading around $27 per barrel.
Thirdly, Draghi said, were the so-called second-round effects – the trickle-down impact of the fall in oil prices on other goods and services.
“We look at … whether low oil prices and low commodity prices do feed into other prices and then that could generate exactly what we want to avoid, namely a spiralling downward phenomenon,” he said.
“So far we don’t have that. But we have seen we’ve got to be very vigilant.”
Draghi also has a message for those who believe the ECB should “look through” volatile energy and commodity prices.
“Even if we look at the recent developments in the non-energy inflation core, so-called core inflation, we don’t have many reasons to be optimistic about that,” he said.

Source: Reuters (By Jeremy Gaunt, Editing by Hugh Lawson)