Eurozone headline inflation hit two percent today, and that has the inflation hawks in Germany screaming.
Yet, ECB president Mario Draghi has promised to maintain QE asset purchases, and Italy has no other real buyer for its bonds.
What’s Draghi to do?
Headline Inflation Hits Two Percent
A milestone.
Annual inflation in the eurozone accelerated to hit 2 per cent for the first time since January 2013 last month, underscoring a sharp rise in prices driven by higher energy costs in the single currency area.
February’s year on year inflation reading, which rose from 1.8 percent and was in line with analyst estimates, comes as inflation hit 2.2 per cent in Germany last month and registered over 3 per cent in Spain.
The eurozone’s core inflation measure, however, which strips out volatile energy and food prices, remained unchanged at 0.9 percent and has remained stubbornly below 1 percent since August 2013.
Inflation Dilemma Headache
With rising inflation, ECB hawks set to crank up pressure for a move towards exiting aggressive monetary easing. This poses a Policy Dilemma for Draghi.
Mario Draghi will get a clear message from European Central Bank hawks next week: drop the doom and gloom.
After four years of weak growth and below-target inflation, price pressures have returned more quickly than the bank expected. Eurostat, the European Commission’s statistics bureau, on Thursday reported that prices rose 2 per cent in the year — rising above a central bank target of “below but close to” 2 percent for the first time since January 2013.
The central bank continues to hold interest rates at historically low levels and has promised to buy €780bn worth of bonds this year as part of its landmark quantitative easing program. Both the rate cuts and the QE program have been a long-running source of irritation, notably among the German political and economic establishment. Influential voices in Berlin have seized on higher German inflation — the country’s annual price rises reached 2.2 per cent in February — to call for rate rises.
Mr. Draghi has so far pledged that he would be ready to cut rates even lower and buy more bonds. His promise is that interest rates would “remain at present or lower levels for an extended period of time”.
ECB Dissent
Last month, Yves Mersch, a member of the ECB’s executive board, asked: “How much longer can we continue to talk about ‘even lower rates’ as being a monetary policy option? Considering the importance of credibility for a central bank, as mentioned, there should be no delay in making the necessary gradual adjustments to our communication.”
Jens Weidmann, Bundesbank president, said this week that the central bank would need to raise its forecasts for inflation this year by as much as half a percentage point from a projection of 1.3 per cent, made in December.
What’s Draghi to Do?
The short answer is nothing.
The long answer is Draghi will likely say something like wage growth is weak, energy prices are transitory, and the ECB will instead focus on core HCIP (Harmonized Index of Consumer Prices, roughly equivalent to the CPI in the US).
Thus Draghi won’t hike, and he is not even likely to taper bond purchases yet.
Italy on Life Support
Italy is on life support and needs a buyer for its bonds. Italy’s 10-year bonds yield 2.138%. Germany’s 10-year bond yield is 0.324%.
The spread between 10-year Italian bonds and 10-year German bonds is 181 basis points (1.81 percentage points).
If there was no risk of default, the yields would be the same. Italian bonds are at a premium for a reason. And if the ECB stopped buying Italian bonds, the spread would grow dramatically.
Mike “Mish” Shedlock
Rock, meet Hard Place….
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Nothing’s ever hard in the made-up world of “‘soft” sciences.
All you have to do, once the populace have been indoctrinated to fall for the scam that inflation has anything to do with some arbitrary basket of prices, is to keep making the “currently watched,” “important” basket ever “core’ier.”
Until the only good in it, is cellphones and other goods directly impacted by Moore’s law.
Then you can just keep on printing and handing money to the banksters, so that they can “fight inflation.” by demanding more and more. In return for less and less from everybody else.
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Yo dude man, I seen some heavy metal in the sky and I caught the groove all the way down to a soft landing and if that ain’t science my name ain’t Einstein.
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Or one could abscond oneself from the ‘Hard Rock’ mentality and simply choose a more classical presentation
Surely the audience will not walk out on such a performance
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The Eurozone is structurally flawed… and the flaws are fatal.
There is a mad scramble happening behind the EU curtain… everyone is stitching together a contingency plan – they all know it’s over, but they will never say so openly…
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Central banks were tasked to set short term interest rates and remove from Governments the ability to regulate interest rates to suit political agendas. Not only is the ECB powerless to control inflation, unemployment and economic growth, it can now be seen, after ten years of QE, to be acting for a new political party – the party of welfare beneficiaries and bankrupt socialist governments. In ten years, we will look back on these times as the times when the lunatics bankrupted all EU countries by enabling deficit spending and suppressing credit risk.
The true differential between German and Italian ten years Government yields should reflect a default risk of (Italy sometime in the next ten years less Germany sometime in the next forty years) or 7.5% PLUS Germany and Italy should have a similar 1-2% premium for time value above a 2% inflation rate. This comes out at a Bund yield of around 4% (v 1/4% now) and BTPS of around 11-12%.
Savers in both countries should be receiving this sort of ten year yield to compensate for inflation, credit risk and time risk premium.
The amount of financial repression being inflicted on savers in all EU countries by transferring wealth to welfare beneficiaries and bad debtors is truly massive and continues to sponsor a misallocation of capital based on the assumption that the differential of risks between good and bad quality borrowers is tiny and should be “squeezed” in towards an average at around zero.
Absurid. To cap itall of, central banks globally have bought into this absurd experiment and are transferring fiat money creations across the globe to each other, leaving no region with 100% control of its own “destiny”.
Here is the central banks “national” anthem
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So, do you think this is all by accident, an unfortunate consequence of insanity, or is it deliberate as a means of transferring wealth from the middle class to both those at the very top and bottom?
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We’ve no way to know whether the world would be better or worse without them.
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But we were told that they would “do whatever it takes” to keep it afloat. A lot of power and money rests on it.
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In a world without them people would not be thinking of if it would be better or worse with them.
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If you are speaking about central banks, you are right. But only in the exact same sense we have no way to know, whether the world would be better or worse off in the aftermath of a nuclear armageddon. Or major meteor strike.
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“What’s Draghi to do?”
…
Well, TPTB could “allow” a recession to occur. That would take care of the inflation thingy … and purchase of bonds continues unabated.
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…but here’s the rub…
if the elitist/globalist (socialist) Left allows a recession, then they’ll SURELY lose regional & national elections by the dozen…
they are truly b/t a rock & a hard place… dig a deeper hole & hope the nationalist/immigration crisis blows-over, OR allow recession/cycle to run it’s course then watch 3/4 of europe shift dramatically to the right & trigger the collapse of the EU system.
They will dig a deeper hole & hope the EU survives the next round of european elections. TPTB will defend their crooked status quo to the bitter end, imo.
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The key is dependency. If they can get enough people dependent upon government handouts/bailouts, they won’t care if it is the devil himself in charge. Recessions only hurt those attempting to self sustain. The dependents are covered.
Look around….everywhere.
People are forming two lines. the first is government entitlements, welfare, food stamps, disability, whatever.
The second are the rich and powerful creating alliances with government, becoming “strategic” to the interests of government…if not directly part of government, and all of those following on in the “investment community” who are hoping to profit from their paid associations to the ongoing corruption that they KNOW they are participating in.
The rest of us are not in a line, we are clustered about, frustrated and confused because we can’t understand WHY, no matter how hard we work, no matter how prudent we save and conserve, we fall further and further behind.
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Most of europe is already dependent on government, yet TPTB are scared shitless of MLP’s nationalist socialism…
They DO care who is in charge.
They can’t hold the status quo w/in a long recession… immigration/migration problem would become even more acute… unemployment… capital concentration… etc.
If EU goes into recession, the pressure on NATIONAL politicians to enact NATIONAL policies/resolutions will be to great to ignore… IOW, an EU recession = end of the EU.
And if EU elections continue their nationalist trend, then the EU will shrink further and likely devolve completely in time…
Either way, TPTB in europe are screwed… their experiment is finished. A rational person looking at the situation would reach this conclusion rather easily, but i would expect TPTB in europe to pretend/extend their denial of reality for at least another one or two years… it takes a while to stitch together a lifeboat for the EU bureaucratic elites…
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Invite Saudi to join EU.
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I suppose the “Euro” is based on the “Full Faith & Credit” of the European Union ?
I thought most of the western europeans (formerly christian) are agnostic or aethiest ?
All that is, except for the Goldman Sachs clan … “doing the Lord’s work”.
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Wow!! We’re really gettin down – in to Keynes’ “…euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. ”
Cynics might liken that to ‘euthanasia of the economic nervous system’ or ‘euthanasia of the economic compass’ al la the USSR but WTF do they know.
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So long as Germany is “in” all is well..
This is why Germany will be given no choice at their election. Merkel or Schulz, same. No choice, no alternative, no change.
Being German they do as they are told.
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Bankers are slowly confiscating people’s stuff by printing inflation. The average person continues to move backward. Especially the fixed income elderly, but also students who have absurd tuition inflation.
Just stop printing already. Divers weights and measures are not the way.
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