It feels almost trite to spend time documenting an innocuous euro-area inflation print on Tuesday.
Given what’s going on in the world this week, you might be inclined to suggest that just about the last thing anybody cares about is the flash print on December CPI for the eurozone. And yet, there’s a very real sense in which the trajectory of inflation in developed markets matters more for asset prices than any shooting war.
After all, the evolution of inflation and inflation expectations dictates the course of monetary policy, and it is monetary policy which preserves the disconnect between market-based measures of volatility and news-based measures of policy and political uncertainty, with the latter having been elevated for years even as the former slumbers.
In that regard, it’s certainly worth mentioning that euro-area inflation rose at the briskest pace in eight months in December.
The 1.3% print matched consensus and brought the headline gauge in-line with core for the first time in months.
The rise in the headline was driven by energy prices, which serves as another reminder that everything is connected – the turmoil in the mideast obviously has the potential to push up crude prices, and thereby inflation expectations.
Inflation remains a country mile away from the ECB’s target as Christine Lagarde takes the reins from Mario Draghi. Policymakers are considering a tweak to the target to make it just 2%, as opposed to “below, but close to 2%”, an ambiguous goal that’s somewhat confusing at times. It would be the first serious rethink in more than a decade and a half.
In addition to ensuring there will be no calls for policy normalization should inflation move sustainably above 1.5%, a new, more definitive commitment to 2% could bolster expectations which, of course, are generally seen as self-fulfilling.
Lagarde previewed the upcoming policy framework review during her first press conference as ECB chief. The rethink, she said, “needs to be comprehensive, needs to look at all and every issue, needs to turn every stone and will take its time”.
And yet, she promised it “will not take too much time”. Specifically, the strategic review will be complete by the end of 2020.
Or, just in “time” for World War III to get going in earnest, driving oil prices to $800.
We jest. Hopefully.
