Ungrounded Fears of Inflation in North America

Ungrounded Fears of Inflation in North America“We will do what we must do to increase inflation and inflationary expectations as quickly as possible.” This quote is not from a new species of economic terrorist. It comes from the mouth of the big boss of the European Central Bank, Mario Draghi. This is somehow a masterful turnaround from the massive anti-inflation policy of Paul Volcker of the Federal Reserve in the early 1980s.

Overcoming inflationary spiral of the 1970s was very difficult and painful. It was necessary to blow the interest rates at historical highs, with the consequences we know about as the economy and unemployment.

And as we grew up with the fear of a return of the inflation beast, I admit having a hard time with this policy, now universal, wanting to rekindle inflation. So even if our central bankers also fear a decline in the inflation rate, it is obvious that the situation in the US Canada is very different from that of Europe.

In the United States in October, the index of consumer prices (CPI) rose 1.7% on an annual basis. This is lower than the target of the Fed is 2%, but it is still far from deflation.

In Canada, for the same period, the CPI rose 2.4%, which represents a significant rebound from the 2.0% in September. This is relatively high for an economy whose growth is not so strong. Only a few months ago the head of the Bank of Canada was concerned about the decline in the CPI, now he should be worried about the reverse. So there seem few risks of deflation in North America.

Overvalued currency

The situation is very different in Europe. Throughout the EU, inflation is well below 1%, for example with a CPI of 0.8% in Germany and 0.5% in France on an annual basis as of October 2014. And the trend is downward.

This explains the reaction of the president of the Central Bank Mario Draghi, who adopted the same kind of stimulatory policy that the US Federal Reserve. The lack of inflation justifies interest rates to zero, or close to it.

We can do all the analysis we want, but it is certain that the low price is a reflection of the lack of economic growth in Europe coupled with an overvalued currency. The more the economy is in bad shape, the more inflation is low or nonexistent. For example, countries such as Spain and Greece have seen a decline in prices last year.

On this plan, Mr Draghi policy is sensible. He should not be losing sight of the real goal is to recover the growth rate of the economy, which would result in the creation of jobs and at least a stabilization of prices.

We must not delude ourselves into believing that monetary policy is a panacea. This is only part of the solution. The other part is to modernize the European economy so that it can compete with other countries.

Yet if deflation fears may be justified in the European Union, one can hardly believe it here in North America.

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