The 0-interest policy in the euro area has been defended by the need to get inflation up to 2%. I have been wondering how that can be possible when cost of work, energy, material, tax and financing gets lower and destroying nature and climate is still not
a cost. Now the Economist's "The end of inflation?" article sheds more light. My take and thoughts on deflation drivers:
Cost of work goes down as (I) it is exported to low salary countries (trade growing from 39% in 1990 to 51% 0f GDP by 2000 only..), (ii) education, automation and data drive leaps in productivity (also in developing countries), (iii) both
leading to generally low inflation which lowers needs for salary increase (iv) lower taxes for low and middle incomes - and more social spending - does the same (v) lower cost for financing doing same (and leading to overconsumption and less saving) and (vi)
dramatically lower cost of consumer electronics and telecom doing same.
Cost of energy and material goes down as enterprises prepare for inevitable and hopefully steep CO2 taxes and increase use of cheap wind and solar.
Cost of financing goes down both by banks and above all capital markets.
Cost of tax goes down in countries that want to stay competitive. This may - especially with today's interest rates - lead to over borrowing as aging increases costs in the welfare state. And Greece can tell how expensive that may become.
All this begs the question if central banks really can have failed to see this. Is it only media that suitably deals with the inflation mystery? And the real motive is to give overindebted countries time to get their houses in order? If they do it..
Another interesting challenge is that policy makers are using old price data and therefore steer blinded. We have Real Time Economy solution for that - in the next blog....