Is The European Central Bank Misguided?

A recent piece by Michael Heise “Low Inflation Is Good News” outlines lowering crude oil and commodity prices, claiming that “lower prices for energy and commodities percolate down through the whole value chain.” Heise argues that the European Central Bank should have this view too, opposed to seeing it as a warning sign pointing to deflation.

Heise's Specifics

“The price index excluding energy and foodstuffs calculated by the ECB itself currently stands at 0.8%, still well above the zero line denoting deflation. But even that is only part of the picture. Lower production costs mean that industrial prices will fall, or rise more moderately, on a broader front. That is not dangerous deflation either, sufficient to sound the monetary policy alarm bells. Disinflation only gets dangerous when it pushes down expectations of future inflation too sharply. Private households and businesses then start to postpone outlays. But there is no sign of this,” says Heise in the article.

Targeting Short-Term Inflation Is Not Practical

He also claims that the “inflation targeting" the central bank uses is convoluted. According to Heise, monetary policies have a lower degree of influence than product prices, rates and state-sanctioned prices. In other words, focusing on short-term target prices leads to an inaccurate reading. Such inaccurate practices can falsely be "interpreted as a genuine crisis symptom." Therefore, the low inflation currently being felt does not necessitate panic, but rather, time and patience will prove more accurate.Jason Papallo had no position with the mentioned entities while writing this article. Visit Jason on Twitter at @Benzinga.