“Iempeccable! Iempeccable! I would like very much to hear the congratulation for an institution that has delivered price stability…” These were the famous words uttered − or rather, exclaimed − by an angry Jean-Claude Trichet back in 2011 during his final press conference when questioned about the monetary policy pursued during his term as ECB President (see https://www.cnbc.com/video/2011/09/09/angry-trichet-defends-ecbs-impeccable-record.html for the clip). He was referring to the target to keep inflation “below, but close to 2%” during the euro’s first 12 years in existence. Sure, there had been ups (“above, but close to 4%” in 2008) and downs (negative inflation in 2009), but at the time of the press conference, the average was 2%. Actually, it was slightly above 2%, but OK.

https://www.ecb.europa.eu/pub/pdf/annex/ecb.sp180507_slides.en.pdf

I was reminded of that particular episode when I stumbled across a graph used by ECB member Peter Praet in a recent speech, highlighting the economic developments in the Eurozone. It shows the movements in overall price levels (the Consumer Price Index, not the year-on-year change that we normally see, indicated by the blue line) versus a steadily rising trend line (the red line). Although this trend line starts prior to 1999 (which is a bit confusing), it actually shows that since that year, the level has risen 2%. And as you can see, back in 2011, the blue line was indeed more or less at the same level as the red line. Congratulations to Draghi and Duisenberg, indeed.

What the graph also clearly shows is that the ECB has since become a lot less successful in achieving this aim of price stability. Since Draghi took the helm after Trichet’s departure, the average inflation rate has barely reached 1.1%, which is clearly below the level we have seen in the US (1.5%) or the UK (1.8%). If you think that this only has to do with the fact that the Eurozone experienced a second crisis (the Eurozone crisis) resulting in a double dip in 2012-2013, maybe this second graph will set the record straight. This graph is taken from the Wall Street Journal and clearly shows that since 2013, the Eurozone has been steadily ‘underperforming’ its peers with respect to inflation. In particular, the fact that inflation has once again declined since 2017 shows that the Eurozone is clearly the odd one out. In terms of growth, the Eurozone actually managed to outperform the other two regions in 2016 and 2017, but inflation trended lower nevertheless.

https://www.wsj.com/articles/the-riddle-of-the-eurozones-missing-inflation-1525635726

There are numerous factors that might explain this, some which are mentioned in the Wall Street Journal article. Lower wage growth, the 2017 rise in the euro, lower credit growth in Europe compared to the US, the widespread introduction of more flexible (and, as a result, cheaper) forms of employment contracts, lower overall expectations of inflation (leading to lower wage demands) and de-unionization (also leading to lower wage demands). Although it is not always clear why these elements should only impact the Eurozone, it was probably their combined effect that led to the outcome.

And then there is always the possibility that inflation could still pick up, but just hasn’t done so yet. The, ‘it-is-just-around-the-corner’ argument. Praet’s presentation, mentioned previously, offers some evidence that might indeed support that case. I will show it, without further comment.

Labor and equipment shortages are on the rise

Capacity utilization in industry is pretty close to the peak level

Surveys seem to point to rising inflationary pressure

https://www.ecb.europa.eu/pub/pdf/annex/ecb.sp180507_slides.en.pdf

So, who knows? Maybe a period of rising inflation is indeed just around the corner. The problem is that this claim has been made for quite some time already, without it ever materializing. We will just have to wait and see. One thing I am pretty sure of though: when Draghi holds his final press conference in October 2019, he will not be able to angrily claim that the track record of the ECB is still ‘impeccable’. Whether he will regret that remains to be seen: he is, after all, credited with saving the Eurozone.