ECB Finds Local Beats Global in Keeping Euro-Area Inflation Low

  • Study finds impact of globalization on wages hard to prove
  • Origin of consumer-price shocks vary strongly over time

The real cause of persistently low inflation in the euro area right now probably lies close to home.

That’s the conclusion of a European Central Bank study of domestic and global drivers of price growth in the 19-nation euro area. The findings, published on Tuesday, may impact policy makers edging closer toward unwinding stimulus even as inflation remains far below their goal.

While a slide in oil can be seen as responsible for a large part of the decline in headline inflation rates in the euro region and the world’s major industrialized nations between late 2011 and early 2016, the trend in the currency bloc since 2013 is better explained by weak underlying pressure, the ECB argued.

“This points to domestic forces having a stronger role in the euro area, and contributing to the fact that HICP inflation excluding energy and food is diverging from that of other advanced economies,” according to the study.

There’s little reason to adjust a tried and tested tool of economic analysis -- the Phillips curve -- which describes the relationship between the labor market and price developments to include broader, global measures of economic slack, the authors wrote.

“Global developments are thought to increasingly affect domestic wage and price pressures via the integration and contestability of labor and product markets,” they conclude. “Although this theory may seem appealing, it is nevertheless difficult to capture empirically.”

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