{"id":4743,"date":"2024-09-18T14:27:13","date_gmt":"2024-09-18T14:27:13","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=4743"},"modified":"2025-03-27T15:50:47","modified_gmt":"2025-03-27T15:50:47","slug":"is-the-ecb-still-too-pessimistic-on-eurozone-inflation","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=4743","title":{"rendered":"Is the ECB still too pessimistic on Eurozone inflation?"},"content":{"rendered":"

Monetary considerations argue that the ECB’s latest inflation forecast, like earlier projections, will be undershot.<\/p>\n

Annual growth of broad money – as measured by non-financial M3 – returned to its pre-pandemic (i.e. 2015-19) average of 4.8% in October 2022. Allowing for a typical two-year lead, this suggested that annual CPI inflation would return to about 2% in late 2024 – see chart 1. The August reading was 2.1% (ECB seasonally-adjusted measure).<\/p>\n

Chart 1<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

The ECB staff forecast in December 2022 was more pessimistic, projecting annual inflation of 3.3% in Q4 2024. The forecast for that quarter was still up at 2.9% in June 2023 after natural gas prices had collapsed.<\/p>\n

Annual broad money growth continued to plunge in 2023, reaching a low just above zero in November, since recovering to a paltry 2.5%. Simplistic monetarism, therefore, suggests that inflation will move below target in 2025 and remain there into 2026 – chart 2.<\/p>\n

Chart 2<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

The September 2024 ECB staff forecast, by contrast, shows inflation rising in Q4 and remaining above 2% until Q4 2025.<\/p>\n

The monetarist relationship, taken at face value, implies a period of annual price deflation in H2 2025 \/ H1 2026. The judgement here is to downplay this possibility and regard the current monetary signal as directional rather than giving strong guidance about levels.<\/p>\n

It is possible that the stock of money is still above an “equilibrium” level relative to nominal GDP. The current ratio is below its 2000-19 trend but in line with the 2010-19 trend, and higher than at end-2019 – chart 3. There may still be “excess” money to act as a deflation cushion.<\/p>\n

Chart 3<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

The forecast of a target undershoot requires services inflation – an annual 4.2% in August – to break lower. The price expectations balance in the EU services survey has displayed a (loose) leading relationship with annual services inflation historically, with the current reading consistent with a move down to about 2.5% in H1 2025 – chart 4.<\/p>\n

Chart 4<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

—–
\nCOMMENT:
\nAUTHOR: David Cotton
\nEMAIL:
\nIP: 78.129.191.50
\nURL:
\nDATE: 09\/18\/2024 02:27:13 PM<\/p>\n

You should indeed take it at face value. It's a mistake to ignore what money is telling us. <\/p>\n

Deflation is high probability. The collapse in (indeed) vacancies should be of much greater concern than inflation for the ECB forthwith.<\/p>\n","protected":false},"excerpt":{"rendered":"

Monetary considerations argue that the ECB’s latest inflation forecast, like earlier projections, will be undershot. Annual growth of broad money – as measured by non-financial M3 – returned to its pre-pandemic (i.e. 2015-19) average of 4.8% in October 2022. Allowing for a typical two-year lead, this suggested that annual CPI inflation would return to about […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-4743","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/4743","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4743"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/4743\/revisions"}],"predecessor-version":[{"id":7052,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/4743\/revisions\/7052"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4743"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4743"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4743"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}