The ECB continues to create higher inflation for the Euro area

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by Shaun Richards

We arrive today at a situation I warned about when the pandemic hit so let me take you back to the 29th of May last year.

This is a surge in money supply growth which has been quite something such that I think we will look back and consider it to be unprecedented. I expect that to be true in absolute terms in many places and it is already being true in relative terms in many.

Actually as I shall explain in a moment there was even more to come but I used the words of BB King to highlight what was, in my opinion, on its way.

Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent
I got the blues
Got those inflation blues.

A push in broad money is expected to raise nominal economic growth ( GDP) in between 18/24 months. That is split between actual growth and inflation and some 18 months after all this started we are seeing the consequences of such action.

The euro area annual inflation rate was 3.4% in September 2021, up from 3.0% in August. A year earlier, the rate
was -0.3%……..In August 2021, industrial producer prices rose by 1.1% in both the euro area and the EU, compared with July 2021,…..In August 2021, compared with August 2020, industrial producer prices increased by 13.4% in the euro area.

I will come to the growth part later but for the moment we can see that the inflationary push is on its way. This is always accompanied by a flood of official denials because central banks decided that “this time is different” and felt they could be like masters of the universe or in the case of President Lagarde a mistress of the universe. In August 2020 the chair of the US Federal Reserve put out a hostage to fortune.

Forty years ago, the biggest problem our economy faced was high and rising inflation. The Great Inflation demanded a clear focus on restoring the credibility of the FOMC’s commitment to price stability.

As I pointed out on the 28th of August last year some of the arrogance here was breathtaking.

Many find it counterintuitive that the Fed would want to push up inflation. After all, low and stable inflation is essential for a well-functioning economy. And we are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes.

I guess he is grateful that the media rarely look back at the consequences of such actions. After all it is usually embarrassing for them too. Also there is another area which as we are looking at Euro area numbers needs to be added because they have spent over 2 decades keeping this out of the consumer inflation numbers.

In the second quarter of 2021, house prices, as measured by the House Price Index, rose by 6.8% in the euro area
and by 7.3% in the EU compared with the same quarter of the previous year. This is the highest annual increase
for the euro area since the fourth quarter of 2006……..Compared with the first quarter of 2021, house prices rose by 2.6% in the euro area and 2.7% in the EU in the second quarter of 2021. ( Eurostat)

Today’s Numbers

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From the ECB earlier.

Annual growth rate of broad monetary aggregate M3 decreased to 7.4% in September 2021 from 7.9% in August.

 

If we just stay with the basics for the moment then we see that we have a broad monetary push of 7.4% but we also know that growth is slowing so the future picture for inflation again looks troubling. Whilst at first it seems as though things are slowing via the reduction in the annual growth rate in fact the monthly increase of 97 billion Euros is the highest in the last 3 months. So the ECB response to higher inflation is in fact to keep its foot on the accelerator.

Growth Problems

As do often in recent years the ECB finds itself with economic growth problems. We looked at the downturn in Spain only yesterday and this morning came another official acknowledgement from Germany.

*GERMANY CUTS 2021 GDP GROWTH FORECAST TO 2.6% FROM 3.5%

*GERMANY RAISES 2022 GDP GROWTH FORECAST TO 4.1% FROM 3.6%

*ALTMAIER: GROWTH HAMPERED BY SUPPLY BOTTLENECKS, ENERGY PRICES  ( @DeltaOne )

I would not worry about the rise for 2022 as that is part of the PR for such a process as they know they will be able to focus attention on the first bit. That is of a cut to economic growth. Personally I wonder if there will be any growth this quarter at all? That is increasingly a generic by the way as I see the same trend in many places.

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At this point we see a clear contradiction between the two objectives for central banks these days. In the case of the ECB the growth one is implied rather than explicit. But we see from the narrow money numbers that it has got the message.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 11.0% in September, unchanged from previous month.

Pumping up barrow money on M1 should impact the economy in 3/6 months but presently there is a catch and in fact two of them. Whilst the monetary impetus is strong that does not help if you cannot get supplies due to shortages. Next it does not help the industries which are being priced out of operations because their energy costs are now too high. So in fact the issue that I originally highlighted as being like having too much petrol in a carburetor and flooding it is likely to be even worse this time around.

Comment

The fundamental issue here is simply growth versus inflation. If you struggle for growth then pumping up the money supply brings with it the risk of an inflation push. To the purists it does not matter how so they would include the energy crisis. To the opponents they argue that the energy price crisis is nothing to do with it, although they are likely to be distracted because they also argued we would not see an inflation push and then that it would be short-lived.

Personally I think that there is an implied link in that the central bankers were happy to take the credit for boosting economic growth quickly. But run away from the consequences of pumping up demand faster than supply could respond. As it happens it has been exacerbated in the energy field by a sequence of official mistakes such as relying too much on sources of power which ebb as well as flow.

I expect things to remain like this.

The harder we push to close the output and inflation gaps, the better the outlook for the euro area economy. And the faster we get there, the stronger our growth potential will be. ( Fabio Panetta ECB March 2nd)

In spite of the fact that he was completely wrong.

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