August 28, 2018

European Central Bank, Frankfurt, Germany: Convergence of core inflation towards the ECB’s medium-term objective is likely to be gradual 

The euro area economy is in its fifth year of recovery, unemployment is close to its pre-crisis level and the output gaps of most countries have closed. Yet, core inflation continues to be low, notwithstanding temporarily high headline inflation due to higher energy prices.

The puzzle

It may look as if the traditional Phillips curve relationship between core inflation and unemployment has broken down over the past five years.

During 2012 to 2014, the euro area experienced a “missing disinflation” episode, where inflation stayed at relatively high levels despite high and increasing unemployment. From 2014 to 2017, there was a “missing inflation” period, with little inflation pressure despite considerable reductions in labor market slack. Some have attributed this to a broken Phillips curve, to difficulties in correctly quantifying slack, or low global inflation. Den Rest des Beitrags lesen »