Tuesday, September 30, 2014

Inflation down yet again in the Euro area | Serious implications for ECB monetary policy statement tomorrow

The Euro area flash inflation report, released yesterday by Eurostat, indicates that the rate of price rises over the twelve months to September this year had dropped even further, from 0.4% to 0.3%, compared to the level for the year to last month, August 2014.

As can be seen from the chart that accompanied the release (above), by far the largest factor in this result is the price of energy. That is bad news for Mario Draghi and the ECB. They want more inflation, not less, but if the trend in the price of oil is anything to go by prices in general are not going to increase anytime soon. The USA has, for the first time in many years, become a net exporter of oil and so-called peak oil, or the estimate of the time at which world reserves begin to run down, has been moved forward quite a bit. This is all, apparently, as a result of the recovery in the USA of shale oil and gas by use of the fracking process.

Serious implications for ECB monetary policy statement tomorrow

Tomorrow (Thursday) sees the monthly ECB interest rate announcement, monetary policy statement and press conference. Previously, the central bank announced measures designed to put more money in circulation in order to increase inflation – they would like it to approach 2% - but there are indications that these are simply not working. The only component of the latest rate estimate to show any upward movement was services, to a little over 1%.

When the inflation announcement was made yesterday the Single Currency suffered yet another drop, to add to its previous falls. All eyes and ears will be on the words of governor Draghi tomorrow to see what happens next. 

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