Economic ResearchPublicationsResearch PapersEuropeThe ECB inflation benchmark at times of falling commodity prices

The ECB inflation benchmark at times of falling commodity prices

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The financial markets are currently reacting extremely sensitively to changes in the rate of inflation in the euro area, with the view prevailing that every further drop in inflation flags up rising deflation risks. That declining commodity prices actually serve as important economic stimuli tends to be ignored. This means that every decrease in the rate of inflation fuels market expectations of additional monetary easing on the part of the ECB, with the focus of expectations increasingly on unconventional measures such as a comprehensive corporate or even government bond-buying program.

Allianz SE
Munich, Nov 28, 2014

At present, however, the ECB is also playing its part in fueling such expectations. At the November 6 press conference, for example, ECB President Draghi stated that the measures most recently adopted by the ECB are also a reaction to the prospect of low inflation. If, as a result of declining commodity prices, inflation forecasts are now being scaled back again and deviations from the 2% mark are widening still further, it is simply logical to expect the ECB to take additional expansionary measures.