Wednesday, February 2, 2011

European Inflation and Unemployment

Source: ECB Jan 31. 2011

Recent data suggest Euro inflation has increased from 2.2% in Dec 2010 to 2.4% in Jan 2010. This jump in inflation is primarily due to the cost push factors, which we are becoming quite familiar with.

If oil prices continue to spike, we may get a repeat of 2008, where ECB inflation rose to 4% before experiencing a brief period of deflation. Again, it would be useful if the ECB published a 'core inflation' measure which stripped out these volatile factors and helped us to understand the underlying inflationary trends.

Apart from the German exporting sector, which is doing very well, European growth is generally sluggish, with some peripheral members of the Euro experiencing a downturn. To prematurely raise rates, in the absence of strong recovery would be a mistake - at least for those countries in recession.

The graph shows the ECB do an admirable job of keeping inflation at 2%. But, unemployment remains at over 10%

European and Global Unemployment

click to enlarge. Source: Eurostat

Objectives of ECB.

Interesting to read objectives of ECB
"...The Treaty establishes a clear hierarchy of objectives for the Eurosystem. It assigns overriding importance to price stability. The Treaty makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment..."

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