Chart of the week

The ECB aims to keep inflation close to, but below, 2%. This is a symmetric objective, meaning that the ECB will act as strongly to counter below-target inflation as it will to counter above-target readings.

Between the creation of the euro and 2008, headline inflation averaged 2.0% and core inflation 1.6%, in line with targets. Since 2009, headline inflation has been sitting at just 1.3% and core inflation at 1.1%. These disappointing undershoots have led the ECB to adopt an extremely accommodative monetary policy stance, as underscored by its most recent action.

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OUR ANALYSIS

When the eurozone’s core inflation was close to 2%, the figure masked major disparities between two groups of countries. In the core group – Germany, France, Benelux, Austria and Finland – core inflation averaged 1.2% prior to 2008. In the periphery group – Greece, Ireland, Italy, Spain and Portugal – the rate was higher, averaging 2.4%.

Up until 2009, the inflation gap between the two groups reflected differences in wage costs, which were rising sharply in the periphery group and led to deep current account deficits for most of these member states at the time, contributing to the eurozone’s financial and economic crisis.

Since 2009, the inflation slowdown across the eurozone as a whole has stemmed essentially from the periphery countries, with inflation in the core group rooted at around 1.2% for the past two decades. The question is whether the road to 2.0% inflation will revive macroeconomic imbalances across the eurozone.

The opinion expressed above is dated 16 October 2019, and liable to change.

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.

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