Friday, 16 January 2015

Deflation in Eurozone? No, There's Still Inflation and it has been Picking Up

Eurostat today confirms that the annual inflation rate dropped below zero to -0.2% in December last year. The dreaded deflation has therefore arrived in the eurozone and monetary cranks* and demagogues are head over heels with the prospect of QE being implemented once again in the eurozone (e.g. here). 

But wait a second. We are here talking about price inflation. This must not be confused with inflation, which is an increase in the money supply. Based on the most recent data as of November 2014, inflation in the eurozone is actually picking up and has done so for the better part of 2014. 

And if another monetary crank, Mario Draghi, gets to realise his dream of adding more zeros to the ECB balance sheet, inflation will likely increase yet further (or fall less than otherwise) fueling higher prices and a weaker euro (the market has already punished the latter). The citizens of the eurozone and owners of the euro end up paying the bill through an ever decreasing purchasing power while the banks rejoice. 

* Ludwig von Mises, the economist, described the monetary crank as follows (in his book Human Action, originally published in German in 1940):
The monetary crank suggests a method for making everybody prosperous by monetary measures. His plans are illusory. However, they are the consistent application of a monetary ideology entirely approved by contemporary public opinion and espoused by the policies of almost all governments. The objections raised against these ideological errors by the economists are not taken into account by the governments, political parties, and the press. 
It is generally believed by those unfamiliar with economic theory that credit expansion and an increase in the quantity of money in circulation are efficacious means for lowering the rate of interest permanently below the height it would attain on a non-manipulated capital and loan market. This theory is utterly illusory. But it guides the monetary and credit policy of almost every contemporary government.


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