Friday, April 04, 2014

Inflation has died, risen, and will come again

European Central Bank President Mario Draghi explains why the recent fall in Eurozone inflation is hard to interpret --

Draghi: On the first point: there are a couple of factors that somehow clouded the analysis of whether this latest inflation data would actually be a material change in our medium-term outlook or not. One has to do with the volatility of services prices and the fact that Easter time this year comes remarkably later than last year. The explanation is that, around Easter time, services expenditure usually goes up – demand for services goes up – especially travel, and this affected last year’s prices and it’s going to affect this year’s prices. So you have a base effect which produced much lower inflation data in March and may well produce higher inflation data next month.

The solution is not to be so fixated on the 12 month change in headline prices, but consider the implication: if the ECB turns out to have reacted too late to deflation because of when Easter happened, we're back to blaming the Moon for things we didn't understand. Silly ancient people did that!