DECRYPTION / INFOGRAPHY - Growth and full employment are back in many countries, but not inflation. Salaries remain everywhere at half-mast. A headache for the ECB and other central banks. The surest enemy of inflation would they be robots?
The twentieth century, its two world wars and the inflationary outbreaks that followed, will it have been a long parenthesis? Ten years after big financial crisis of 2007-2008, the international economy finds a cruise regime that is more and more similar to the nineteenth century, the century of the first industrial revolution (steam engine), triumphant capitalism, the exuberance of stock markets ... and the absence total inflation. The word itself, in its monetary sense today his, did not appear in France until 1919: the thing did not exist before the 1914 war!
Central banks, the US Fed, the ECB and the Bank of Japan, have certainly managed to curb the risks of deflation, the simultaneous fall in prices and economic activity, which led to the political catastrophes of the 1930s. big money makers can not get consumer prices to take off at a rate of 2%, which they consider optimal. They ran the money billboard like crazy wizard apprentices. The full employment enjoyed by the United States and much of Europe should logically push up wages and prices. Nothing works. Other forces are joining forces to calm the game: globalization and China's competition, population aging, the digital revolution and the job insecurity it promotes. Should we resign ourselves to the very slight price increases, around 1% per year, which are our lot?
● Abnormal price weakness
The press conferences of the President of the European Central Bank do not pretend to be parties of giggles. And yet every time Mario Draghi explains, with his gaze at the Buster Keaton, that "the mandate of the ECB is to maintain the rise in consumer prices below, but close to, 2%", it is believed to plunge into a crazy world where words take on a whole different meaning than in ordinary life .
The characteristic of a central bank, it had been learned, is to defend the value of the currency it issues and thus "price stability". This is the official mission of the ECB in Europe (Article 127 (1)). But for Mario Draghi, and the other governors, stability does not mean that prices would stay on average at the same level, but that they are growing at a rate of around 2%! An almost universal standard, which all the major central banks of the planet have finally adopted.
German public opinion is protesting that the ECB does not define stability by zero growth. "It's hard to measure inflation exactly, but experience and theory show that numbers tend to be higher than reality. When statisticians say that inflation is at 0% it is highly likely that we are below, "said Vitor Constancio, vice-president of the ECB recently to a question from the German newspaper. Börsen-Zeitung. We must therefore give ourselves a margin of caution to avoid the deflationary trap. This is all the more necessary in the European Monetary Union, a quasi-federation of states: zero inflation on average would mean that some countries would be in negative, in depression, judging it to the ECB.
But since the end of the financial crisis, we remain everywhere well below the standard of 2%. Prices have increased by only 0.2% annual average since 2009 in Japan, 1% in the euro area, and 1.5% for the US economy. Certainly the collapse of oil prices, which lost three-quarters of its value between 2014 and 2015 before strengthening somewhat, exacerbated general asthenia; the euro zone even recorded zero inflation in 2015!
The whims of the black gold, however, play only a secondary role. "The Fed, which prefers the indicator of core inflation (excluding commodities), has been below its 2% annual norm for 100 months out of 104 since the crisis in the United States!" Calculates Andrew Kenningham , the world's chief economist at Capital Economics. And to wonder: "Will inflation ever restart?"
● EDF, ECB, INSEE, they have trouble understanding
All the certainties forged in the twentieth century, which has been an extraordinary laboratory in vivo of all excesses, seem to collapse. "Inflation is always and everywhere a monetary phenomenon, in that it is and can only be generated by an increase in the quantity of money faster than that of production," said Milton Friedman. The 1976 Nobel Prize for Economics, the Pope of Monetarism (1912-2006), was very impressed by the depression of the 1930s that had left one-quarter of Americans unemployed; he blamed it on overly restrictive monetary policies. To the point of suggesting raining "helicopter" greenbacks on the crowd if we were to face such a situation.
The idea was taken up again, not literally but transposed to the billboard, in the aftermath of the 2008 Lehman Brothers Crash. Afraid that the United States could return to depression, Ben Bernanke, the president of the Fed, flooded the US economy with liquidity, to more than double the balance sheet of the central bank. This easy money has cheered up Wall Street (the Dow Jones index has more than tripled since its winter 2009 meltdown), but consumer prices remain untouched.
Faced with the great slippages of the years 1965-1982, the Prime Minister Raymond Barre, "The best economist of France" according to President Valéry Giscard d'Estaing, then explained the phenomenon "as an excess of purchasing power of individuals in relation to the goods placed at their disposal." Unfortunately, this definition of common sense no longer works in France in 2017. While "growth begins to stumble on the productive capacity of the French economy," says Emmanuel Jessua, of the Coe-Rexecode Institute, these limitations of supply should normally boost prices. But this is not at all what we observe; French inflation (1.1% over the last twelve months) remains one of the lowest in the entire euro area (1.5% on average and 1.7% in Germany).
Inflationary mechanisms seem to have become as impenetrable as the mysteries of colds. Do not doctors usually say that "an unhealthy cold lasts for seven days, and that it heals within a week when it is treated?" In the end, Ms. Michu has much clearer ideas than INSEE whose definition is at least tautological: "Inflation is the loss of the purchasing power of the currency which results in a general and lasting increase in prices." With this precision which adds to the confusion: "To evaluate the rate of inflation we use the consumer price index (CPI). This measure is not complete, as the inflation phenomenon covers a wider field than that of household consumption, "according to INSEE. Understand who will want. And yet it is not explanations that are missing.
● The decalogue of a new world
To be the great mute of the economic scene, including in emerging countries (just 1.6% over the last twelve months in China), inflation remains the keystone on which weigh all forces of globalization and the digital revolution. "The absence of inflation in 10 explanations": it is a true decalogue that defies Bruno Colmant, chief economist of Bank Degroof Petercam and member of the Royal Academy of Belgium. It has the merit of being exhaustive:
1 - After the excesses of the 1970s, "great moderation": central banks and rigor took power.
2 - The Aging of the population induces a rise in savings.
3 - The digital revolution and artificial intelligence are destroying jobs.
4 - The world has entered a "secular stagnation" of low growth.
5 - The "Great Recession" of 2008-2009 has lastingly precarious jobs.
6 - Social inequalities exacerbate hoarding behavior.
7 - Public debt requires savers to anticipate tax increases.
8 - In the euro area, crisis management has been at the expense of employment.
9 - Multinational companies are no longer in debt and are net lenders (Apple).
10 - Online commerce and Amazon are intensifying price competition.
These structural changes mark a new world where national inflationary pressures are diluting in globalized competition, where the bargaining power of the unions has shattered in the face of technological transformations with the force of law.
The central bankers are the first to worry, because their traditional landmarks are disappearing. The links between unemployment, wage developments and prices have broken down. But they were their reason for being farther fathers.
● The best and the worst of things
"The Phillips curve has flattened," Jackson Yolen's symposium at the end of August said. The expression seems sibylline, but it must be known because the central bankers swear by the economist William Phillips (1914-1975). He was the first to establish a reverse relationship between the unemployment rate (on the abscissa) and the inflation rate (on the y-axis): the lower the first, the higher wages (and prices), and vice versa.
For its part François Villeroy de Galhau expresses an identical concern, even if the Governor of the Bank of France does not refer to Phillips by name: "We are convinced that the usual sequence between growth, wages and inflation is at work, even if it will take more time than before.
Still goes that the Phillips curve is less arcuate, but it becomes completely flat, would be a nightmare for the central banks which then would not take any more on nothing. The situation has become particularly embarrassing for the ECB, which no longer knows where to turn. "It is not impossible that the core inflation of the ECB will never come close to the target of 2% even if full employment is achieved," warns Patrick Artus. Natixis' chief economist is referring to labor market tensions in several eurozone countries, including Germany. Even in France, 42% of entrepreneurs say to INSEE have difficulties in recruiting competent staff.
The absence of inflation is the best and the worst of things. The dream for consumers, and a source of blockage for all others, whether they are central bankers or simple employees.
Source: © Will inflation stay forever very low?