At a time when too many market participants are seemingly terrified of hyperinflation (or at least if you attribute part of gold’s summer surge and recent record highs in Bitcoin to debasement concerns), there sure seems to be a lot of disinflation going around.
While it’s undoubtedly true that the pandemic was a supply shock and thus could add to inflationary pressures down the road, COVID-19 was first and foremost a demand shock of epic proportions. Just ask the oil industry. Or the services sector.
That means that whatever happens over the medium- to longer-term, we’re still not done working through the deflationary effects. Given that, it should come as no surprise that consumer prices dropped again in Europe last month. CPI was -0.3% on the flash read, more sluggish than the expected -0.2%.
So, that’s four straight months of negative prints on the headline gauge. Core remained stuck at a record low of 0.2% last month.
To be sure, this was expected. ECB officials have said that inflation is likely to remain negative for at least a few more months, as the oil price shock and tax cuts work their way through.
Still, new lockdown measures instituted last month across Europe’s largest economies imperil the outlook further. In Germany, for example, CPI slipped at the swiftest pace in more than 10 years.
This will make it even more difficult for the ECB to hit its ever elusive target, which is now so far away that Christine Lagarde can’t even see it through the clouds (but you can see it on the red line in the figures above).
The ECB will almost surely top up its pandemic emergency QE program this month, bringing the facility’s firepower to nearly €1.9 trillion.
Some might be inclined to call that an example of “Einstein insanity” — that is, doing the same thing over and over again and expecting different results. Asset purchases and negative rates have failed to bring inflation sustainably to target in the post-financial crisis era, so why should they work any better in that regard now?
I’d note two things. First, Einstein never actually said that about insanity. Second, and more germane, if it’s insane for central banks to keep buying assets and cutting rates with the expectation that inflation will eventually rise even though that’s never worked before, what does that say about all the pundits who insist that “money printing” will eventually lead to hyperinflation? They must be insane squared.