» Global Deflation Risks: Adding Heat to the Debate? Decision Economics

Global Deflation Risks: Adding Heat to the Debate?

Posted April 7, 2016 by rvillareal

Summary Highlights

 

  • A (further) indictment of CPI targets as a policy guide for central bankers is the extent to which consumer prices in the last few years may have been undermined by factors exogenous to the economic backdrop.
  • In particular, consumer prices pressures in Europe in the last few years may have been undermined by the surge in global temperatures.
  • Indeed, such a surge in temperatures may explain not just the weakness in food and energy inflation but even core rates.
  • If so, this is also an indictment of central banks. The likes of the ECB have tried to offset something (ie the climate) that they could have no control over, instead causing, or at least accentuating, imbalances in financial markets and real estate markets via ever-expansionary monetary policies.
  • Regardless, there are signs that the spike in temperatures may be in the process of reversing as the El Nino effect subsides. In the Eurozone, lessons from the past suggest any cooling in temperatures could add around a percentage point to headline inflation in the next 12-18 months!
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