Recession Depressing German Inflation

January 29, 2009

In times of severe recession such as these, it is a semantic point whether a central bank ties policy to real activity or price trends.  Both strategies lead to the same place.  Take the case of Germany where consumer prices fell 0.9% at a seasonally adjusted annual rate in the six months to January in contrast to an annualized 2.9% rate of rise over the previous six months to July 2008.  On-year CPI inflation in the process fell from 3.3%, some 1.4 percentage points above the ECB definition of price stability, to 0.9%, which is not only below the target floor but in fact so low as to raise the risk of deflation if economic recovery does not begin as soon as hoped and assumed.  There had previously been only two months with a sub-1.0% CPI inflation print since November 1999.  The last thing ECB officials should want to allow now is for medium-term price expectations to break downward as actual inflation dips in coming months below zero.  They have been warning that such submersion will be temporary and reversed before the end of this year.  But economist forecasts for the onset of recovery in the euro area as well as other major world regions are getting pushed back to a later time, and that has implications for the the future size of excessive aggregate economic supplies and the path of inflation.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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