Inflation data from Europe pose doubts over effectiveness of ECB policy

The first batch of inflation data is out from Europe and so far, it has done nothing but to pose doubts over the effectiveness of monetary policy in Europe. The European Central Bank (ECB) is undoubtedly doing utmost. Interest rates are deep in the negative territory; deposit rate is at -0.4 percent and the central bank is purchasing assets at a record pace of €80 billion per month. Yet, inflation remains a dream.

Spain, Europe’s fourth-largest economy has suffered zero or negative inflation since June 2014 and the latest batch of data showed that the prices are down -0.3 percent in August from a year ago. Similarly, in Germany, which is Europe’s largest economy, the first batch of regional inflation data is out. Saxony, which is the first major region to report inflation statistics for August, shows that inflation remained at just 0.5 percent on a yearly basis, whereas ECB’s target is close to but below 2 percent. On a monthly basis, inflation edged down by -0.1 percent in August.

In recent days, there have been chorus calls for the fiscal authority to provide support to the monetary policies, which so far has been met with skepticism. Speaking at Jackson Hole Symposium, organized by Kansas City Fed, European Central Bank’s Benoit Cœuré said that if the government does not take necessary measures in their policy domains, “we may need to dive deeper into our operational framework and strategy to do so”.