Will a worsening outlook for inflation force the ECB to act?

PATIENCE, PERSISTENCE and prudence: the latest incarnation of the European Central Bank’s policy guidance appears to take a leaf out of early Christian writings on virtue. The central bank has counselled that, because it takes time for pricing pressures to recover from crisis years, it will keep interest rates unchanged at least through the summer of this year.

Its waiting game, though, is being sorely tested. Underlying pricing pressures have been doggedly low for years. Now gloomy economic news risks further delaying their recovery. At its monetary-policy meeting on March 7th the bank will have to consider whether to ease policy.

The headline inflation rate, which stood at 1.4% in January, has been buffeted around by movements in oil prices. But core inflation, which strips out volatile components such as food and energy prices, has proved difficult to budge. It has hovered around 1% since 2015. That is subdued compared with its average level in 2000-07, and far off the bank’s target of headline inflation below, but close to, 2%.

The bank had hoped that above-trend economic growth would drive up wages and eventually force companies to put up their consumer prices. Indeed, economic growth was robust in 2017 and early 2018; annual wage growth had risen to 2.5% by the third quarter of 2018, a percentage point...



via The Economist: Finance and economics Business Feeds

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