1. No category

Inflation and deflation risks:
How to recognise them? How to
avoid them?
Lorenzo Bini-Smaghi
Member of the Executive Board of the
European Central Bank
XXI Villa Mondragone International Economic Seminar
“Global Crisis and Long Term Growth: A New Capitalism Ahead?
Tor Vergata Economic Foundation
CEIS – Centre for Economic and International Studies
University of Rome “Tor Vergata”
Rome, 24 June 2009
The decline in HICP inflation is mainly explained by
developments in food and energy items
(annual growth rates and percentage point contribution)
5
5
overall HICP
4
4
contribution of the
food component
3
HICP excl.
energy and
food
3
2
2
1
1
0
0
contribution of other contribution of the
HICP components
energy component
-1
2004
2005
2006
2007
2008
-1
2009
Contribution to HICP inflation. Latest observation: May 2009.
Sources: Eurostat and ECB calculations.
2
Excluding energy and food, there is little sign of
widespread price cuts
25%
alle items excl. food
and energy
all items
25%
20%
20%
15%
15%
10%
10%
5%
5%
Note: dotted lines indicate averages 1996-2009
0%
1996
0%
1998
2000
2002
2004
2006
2008
Share of HICP items with negative annual inflation rates. Latest observation: May 2009.
Sources: Eurostat and ECB calculations.
3
Share of HICP items with negative annual rates of
change is broadly in line with historical patterns
25%
25%
20%
20%
average
1999-2008
15%
15%
1998
2009
10%
10%
5%
5%
0%
0%
Jan
Feb
Mar
Apr
May
HICP excluding food and energy: share of HICP items with negative annual growth rates.
Sources: Eurostat and ECB calculations.
4
Most prices in the euro area are still growing at
annual rates of 1% or above
(percentage share)
R ents, M eat,
B read and cereals
30
25
Liquid and perso nal transpo rt
fuels, Electro nical equipm ent
20
Transpo rt by air,
C lo thing m aterials,
Teleco m
15
R estaurants and cafes,
C ultural services
Electricity
H eat
energy
M ilk, R eco rding m edia
10
Jewellery
Oil &
fats
5
7 to 8
8 to 9
9 to 10
>10
3
4
5
6
7
to
to
to
to
to
2
3
4
5
6
-7 to -6
-6 to -5
-5 to -4
-4 to -3
-3 to -2
-2 to -1
-1 to 0
0 to 1
1 to 2
<-10
-10 to -9 to -8
-8 to -7
0
Distribution of weighted annual rates of change of HICP items in May 2009
Sources: Eurostat and ECB calculations.
5
Measures of underlying inflation have come off their
peak but are not exceptionally low
(annual growth rates)
4.5
Range of exclusion-based
underlying measures(*)
4.0
3.5
HICP inflation
3.0
2.5
2.0
1.5
1.0
0.5
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0.0
Measures of underlying HICP inflation. Latest observation: May 2009.
Sources: Eurostat and ECB calculations.
Note: (*) Range of permanent exclusion-based (e.g. HICP ex energy, HICP ex energy and food), statistical
exclusion-based (trimmed means, weighted median) and econometric (dynamic factor model) measures.
6
Forecasters in Euro Zone Barometer expect the spell
of negative inflation in 2009 to last only a few months
(annual growth rates)
2.5
EZB (average)
Range of forecas ts
from €ZB
2.0
1.5
1.0
0.5
0.0
-0.5
HICP inflation forecasts from EuroZone Barometer (€ZB).
Source: EuroZone Barometer (June 2009 issue).
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
-1.0
7
Inflation projections for 2010 revised gradually down
recently, but the median is still above 1%
1 .5
Jun
1 .1
M ay
1 .1
M ar
1 .4
Apr
1 .2
F o re c as t
F o re c as t
F o re c as t
F o re c as t
F o re c as t
F o re c as t
Jan
1 .6
Feb
1 .6
fro m
fro m
fro m
fro m
fro m
fro m
J an 0 9
Feb 0 9
M ar 0 9
Apr 0 9
M ay 0 9
Jun 0 9
Value of density function
1
0 .5
0 .0
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
H I C P an n u al growth rate
Distribution of EuroZone Barometer HICP forecasts for 2010.
Sources: EuroZone Barometer and ECB staff calculations.
2.4
2 .6
2 .8
3
3 .2
3 .4
8
Measures of economic slack have played a fairly
modest role in the inflation process in the euro area
(annual percentage change and percentages; quarterly data)
6
4
HICP inflation
2
0
Range of output
gaps(*)
-2
-4
-6
-8
2000
2002
2004
2006
2008
HICP inflation and output gap.
Sources: Eurostat, OECD, IMF and European Commission.
Note: (*) Output gap estimates from the OECD, the IMF and the European Commission.
9
Expectations based on consumers’ survey have
declined recently, in line with inflation
(percentage balance and year-on-year growth rates)
6.0
80
70
Jan 2002: euro cash
changeover
60
5.0
inflation perceptions
(left-hand scale)
4.0
50
40
HICP inflation (right
hand-scale)
3.0
30
2.0
20
10
1.0
0
inflation expectations
(left-hand scale)
-10
-20
1995
0.0
-1.0
1997
1999
2001
2003
2005
2007
2009
HICP inflation and consumers’ qualitative inflation perceptions and expectations. Latest observation: May 2009.
Sources: EC Consumer Survey and Eurostat.
10
The ECB’s Survey of Professional Forecasters (SPF)
suggests that deflation is not a likely event
Probability distribution of expected
inflation in 2009
2008 Q4 SPF
2009 Q1 SPF
Probability distribution of expected
inflation in 2010
2008 Q4 SPF
2009 Q2 SPF
50
50
40
40
30
30
20
20
10
10
0
2009 Q1 SPF
2009 Q2 SPF
0
<1.0
-1.0 -0.5 0.0- 0.5- 1.0- 1.5- 2.0- 2.5- 3.0- 3.5to - to - 0.4 0.9 1.4 1.9 2.4 2.9 3.4 3.9
0.6 0.1
< -1.0 -1.0
to 0.6
-0.5 0.0- 0.5to - 0.4 0.9
0.1
1.01.4
1.51.9
2.0- 2.5- 3.02.4 2.9 3.4
Cross-sectional distribution of 2009 and 2010 inflation expectations among SPF respondents. Various
vintages. Latest vintage 2009 Q2.
Source: ECB Survey of Professional Forecasters.
11
Long-term inflation expectations from ECB’s SPF
have remained firmly anchored
(percentage of respondents)
2008Q 3
2008Q 4
2009Q 1
2009Q 2
50
40
30
20
10
0
< = 1 .5
1 .6
1 .7
1 .8
1 .9
2 .0
2 .1
2 .2
2 .3
2 .4
2 .5 o r
m o re
Cross-sectional distribution of longer-term (2013) inflation expectations among SPF respondents.
Source: ECB Survey of Professional Forecasters.
12
Deflation fears have abated, but uncertainty remains
high
8.0
6.0
4.0
2.0
0.0
Mar-08 May-08
-2.0
-4.0
-6.0
Jul-08
Sep-08
Nov-08
Jan-09 Mar-09 May-09
25 pct. to 75 pct. quantiles
15 pct. to 85 pct. quantiles
5 pct. to 95 pct. quantiles
1 Year Inflation Swap Rate
-8.0
Perceived inflation uncertainty extracted from inflation derivatives
Sources: Bloomberg and ECB calculations.
Daily data; Last observation: 17 June 2009
13
Short-term inflation expectations have shifted up in
recent quarters
5.0
4.0
3.0
Realised HICP
Implied HICP path on 18 Jun 2009
2.0
1.0
0.0
Implied HICP path end-Nov 2008
-1.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Path of year-on-year HICP inflation rates derived from inflation-linked swaps (percent per annum).
Sources: Eurostat, Reuters and ECB calculations.
14
Long-term expectations remain well-anchored
3.0
3.0
2.5
5-year forward 5 years
ahead BEIR (s.a.)
10 year BEIR (s.a.)
2.5
2.0
2.0
1.5
1.5
1.0
1.0
5 year BEIR (s.a.)
0.5
0.5
0.0
Jul-08
0.0
Sep-08
Nov-08
Break-even inflation rates for the euro area
Sources: Reuters, ECB calculations.
Daily data; Last observation: 18 June 2009
Jan-09
Mar-09
May-09
15
Negotiated wages: Country breakdown
Negotiated wages
(y-o-y growth rates)
1999-2008
Germany
France
Italy
Spain
Netherlands
Belgium
Austria
Greece
Ireland
Finland
Portugal
Slovakia
Luxembourg
Slovenia
Cyprus
Malta
Euro Area
1.9
2.4
2.5
3.0
2.7
2.4
2.4
2.6
3.1
6.0
2.4
(a)
2008
2.8
3.0
3.5
3.5
3.5
3.6
3.1
4.3
3.0
9.0
3.2
2008 Q1 2008 Q2
2.6
2.7
2.7
3.3
3.0
3.0
3.0
3.6
3.5
7.6
2.8
1.8
3.1
3.2
3.5
3.5
3.3
3.2
4.5
2.7
8.5
2.9
2008Q3
2008Q4
2009Q1
3.0
3.0
4.2
3.5
3.7
4.0
3.2
5.0
2.9
10.2
3.4
3.7
3.0
3.7
3.5
3.6
4.2
3.1
4.0
2.6
9.7
3.6
3.1
2.7
2.8
3.5
3.8
3.5
3.9
3.8
7.5
3.2
Sources: BIS, European Commission, ECB calculations.
Notes: Negotiated wages reflect the increase in basic pay (excluding bonuses, overtime compensation and so on) agreed between employers
and employees, excluding the impact of social security contributions. The exact coverage and definition from one country to another,
lowever, may vary. Data are nsa.
(a) Yearly average over the period.
16
Annual M3 growth decelerated further in 2009Q1
(percentage changes)
15
3
annual rate of
growth (lhs)
10
2
5
1
0
0
month-on-month rate of
growth (rhs)
-1
A
pr
05
Ju
l0
O 5
ct
05
Ja
n
0
A 6
pr
06
Ju
l0
O 6
ct
06
Ja
n
0
A 7
pr
07
Ju
l0
O 7
ct
07
Ja
n
0
A 8
pr
08
Ju
l0
O 8
ct
08
Ja
n
0
A 9
pr
09
-5
Source: ECB calculations.
17