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Thursday, March 28, 2024

Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit”

Courtesy of Mish.

The ECB has been concerned about falling consumer prices. I propose that's 100% stupid, yet that's the concern.

When the euro declined vs. the US dollar, the ECB was happy that inflation would inch back up. The fear now is that falling oil prices will take away the alleged gain of a falling euro.

With that backdrop, credit the Financial Times for the absurd headline of the week: Eurozone Fails to Benefit from Weak Currency as Oil Price Slides.

Pity the policy makers given the job of rescuing the eurozone from deflation.

The unorthodox steps the European Central Bank has taken since June – including a programme of private-sector asset purchases – have caused a steep fall in the euro. The single currency is down 8.4 per cent against the dollar and 4.75 per cent on a trade-weighted basis from its peaks this year.

The weaker exchange rate will ease pressure on the ECB in its fight to raise inflation back to its target of just below 2 per cent. Mario Draghi, the central bank’s president, has said the currency’s earlier strength explains 0.4 percentage points of the fall in inflation since 2012. In that year, prices were growing 2.7 per cent a year.

But just as this depreciation is starting to fuel inflation, the ECB must contend with a fall in oil prices that all but wipes out the effect of a sliding currency. A weaker euro should swiftly raise the cost of imported energy. Instead, Brent crude has fallen 9 per cent in euro terms this month alone. This is the main reason why eurozone inflation fell again in September to 0.3 per cent, a five-year low – a figure confirmed by data on Thursday.

“The drop in oil prices is a problem for the ECB,” says Marco Valli, an economist at UniCredit, adding, however, that the situation would have been far worse without the single currency’s fall.

“The impact on inflation is already visible and significant – if you still had the euro at 1.40 to the dollar, eurozone inflation would probably be zero.”

Pity the Keynesian Fools

Financial Times writers Delphine Strauss and Claire Jones say "pity the policy makers." I say pity the fools who believe the thesis of their article.

There is absolutely no benefit to rising consumer prices. Things are even worse if prices rise but wages don't.

The very essence of rising standard of living is more goods at lower prices thanks to innovation and rising productivity. And there is no reason to believe wages will rise (or keep up with prices) if prices do rise….

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