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 29
The decline in HICP inflation is mainly explained by developments in food and energy items (annual growth rates and percentage point contribution) 5 5 4 overall HICP 4 3 contribution of the food component HICP excl. energy and food 3 2 2 1 1-1 contribution of other HICP components 24 25 26 27 28 29 Contribution to HICP inflation. Latest observation: May 29. Sources: Eurostat and ECB calculations. contribution of the energy component -1 2
Excluding energy and food, there is little sign of widespread price cuts 25% alle items excl. food and energy all items 25% 2% 2% 15% 15% 1% 1% 5% % Note: dotted lines indicate averages 1996-29 1996 1998 2 22 24 26 28 5% % Share of HICP items with negative annual inflation rates. Latest observation: May 29. 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% 2% 15% 1% average 1999-28 29 1998 2% 15% 1% 5% 5% % 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) 3 R ents, M eat, B read and cereals 25 Liquid and personal transport fuels, Electronical equipment Restaurants and cafes, Cultural services 2 15 1 5 M ilk, Reco rding media Oil & fats Transport by air, Clothing materials, Telecom Electricity Jewellery Heat energy <-1-1 to - -9 to -8-8 to -7-7 to -6-6 to -5-5 to -4-4 to -3-3 to -2-2 to -1-1 to to 1 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6 6 to 7 7 to 8 8 to 9 9 to 1 >1 Distribution of weighted annual rates of change of HICP items in May 29 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 4. 3.5 3. 2.5 2. 1.5 1..5. 1996 1997 HICP inflation 1998 1999 2 21 Range of exclusion-based underlying measures(*) 22 Measures of underlying HICP inflation. Latest observation: May 29. 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. 23 24 25 26 27 28 29 6
Forecasters in Euro Zone Barometer expect the spell of negative inflation in 29 to last only a few months (annual growth rates) 2.5 2. 1.5 1..5. -.5-1. Range of forecasts from ZB EZB (average) Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 HICP inflation forecasts from EuroZone Barometer ( ZB). Source: EuroZone Barometer (June 29 issue). 7
Inflation projections for 21 revised gradually down recently, but the median is still above 1% 1.5 Jun 1.1 May 1.1 Apr 1.2 Mar 1.4 Jan 1.6 Feb 1.6 Forecast from Jan 9 Forecast from Feb 9 Forecast from M ar 9 Forecast from Apr 9 Forecast from M ay 9 Forecast from Jun 9 1 Value of density function.5..2.4.6.8 1 1.2 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 3 3.2 3.4 HICP annual growth rate Distribution of EuroZone Barometer HICP forecasts for 21. Sources: EuroZone Barometer and ECB staff calculations. 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 2 HICP inflation -2-4 Range of output gaps(*) -6-8 2 22 24 26 28 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) 8 6. 7 6 5 Jan 22: euro cash changeover inflation perceptions (left-hand scale) 5. 4. 4 3 2 HICP inflation (right hand-scale) 3. 2. 1 1. -1 inflation expectations (left-hand scale). -2 1995 1997 1999 21 23 25 27 29-1. HICP inflation and consumers qualitative inflation perceptions and expectations. Latest observation: May 29. Sources: EC Consumer Survey and Eurostat. 1
The ECB s Survey of Professional Forecasters (SPF) suggests that deflation is not a likely event Probability distribution of expected inflation in 29 Probability distribution of expected inflation in 21 5 28 Q4 SPF 29 Q1 SPF 29 Q2 SPF 5 28 Q4 SPF 29 Q1 SPF 29 Q2 SPF 4 4 3 3 2 2 1 1 < - 1. -1. to -.6 -.5 to -.1.-.4.5-.9 1.- 1.4 1.5-1.9 2.- 2.4 2.5-2.9 3.- 3.4 3.5-3.9 < -1. -1. to -.6 -.5 to -.1.-.4.5-.9 1.- 1.4 1.5-1.9 2.- 2.4 2.5-2.9 3.- 3.4 Cross-sectional distribution of 29 and 21 inflation expectations among SPF respondents. Various vintages. Latest vintage 29 Q2. Source: ECB Survey of Professional Forecasters. 11
Long-term inflation expectations from ECB s SPF have remained firmly anchored (percentage of respondents) 5 28Q 3 28Q 4 29Q 1 29Q 2 4 3 2 1 <=1.5 1.6 1.7 1.8 1.9 2. 2.1 2.2 2.3 2.4 2.5 or more Cross-sectional distribution of longer-term (213) inflation expectations among SPF respondents. Source: ECB Survey of Professional Forecasters. 12
Deflation fears have abated, but uncertainty remains high 8. 6. 4. 2.. Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9-2. -4. -6. -8. 25 pct. to 75 pct. quantiles 15 pct. to 85 pct. quantiles 5 pct. to 95 pct. quantiles 1 Year Inflation Swap Rate Perceived inflation uncertainty extracted from inflation derivatives Sources: Bloomberg and ECB calculations. Daily data; Last observation: 17 June 29 13
Short-term inflation expectations have shifted up in recent quarters 5. 4. Realised HICP Implied HICP path on 18 Jun 29 3. 2. 1.. Implied HICP path end-nov 28-1. 24 25 26 27 28 29 21 211 212 213 214 215 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. 3. 2.5 5-year forward 5 years ahead BEIR (s.a.) 1 year BEIR (s.a.) 2.5 2. 2. 1.5 1.5 1. 1..5 5 year BEIR (s.a.).5. Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9. Break-even inflation rates for the euro area Sources: Reuters, ECB calculations. Daily data; Last observation: 18 June 29 15
Negotiated wages: Country breakdown Negotiated wages (y-o-y growth rates) 1999-28 (a) 28 28 Q1 28 Q2 28Q3 28Q4 29Q1 Germany 1.9 2.8 2.6 1.8 3. 3.7 3.1 France 2.4 3. 2.7 3.1 3. 3. 2.7 Italy 2.5 3.5 2.7 3.2 4.2 3.7 Spain 3. 3.5 3.3 3.5 3.5 3.5 2.8 Netherlands 2.7 3.5 3. 3.5 3.7 3.6 3.5 Belgium 2.4 3.6 3. 3.3 4. 4.2 3.8 Austria 2.4 3.1 3. 3.2 3.2 3.1 3.5 Greece - - - - - - Ireland - - - - - - Finland 2.6 4.3 3.6 4.5 5. 4. 3.9 Portugal 3.1 3. 3.5 2.7 2.9 2.6 3.8 Slovakia - - - - - - Luxembourg - - - - - - Slovenia 6. 9. 7.6 8.5 1.2 9.7 7.5 Cyprus - - - - - - Malta - - - - - - Euro Area 2.4 3.2 2.8 2.9 3.4 3.6 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 29Q1 (percentage changes) 15 3 1 annual rate of growth (lhs) 2 5 1 month-on-month rate of growth (rhs) -5-1 Apr 5 Jul 5 Oct 5 Jan 6 Apr 6 Jul 6 Oct 6 Jan 7 Apr 7 Jul 7 Oct 7 Jan 8 Apr 8 Jul 8 Oct 8 Jan 9 Apr 9 Source: ECB calculations. 17