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DECRYPTION / INFOGRAPHIC – Growth and full employment are back in many countries, but inflation is not. Wages remain at half mast everywhere. A headache for the ECB and the other central banks. Could the surest enemy of inflation be robots?

The XNUMXth century, its two world wars and the inflationary outbreaks that followed, will it have been only a long parenthesis? Ten years after the great financial crisis of 2007-2008, the international economy is returning to cruising speed which is more and more akin to the 1919th century, the century of the first Industrial Revolution (steam engine), triumphant capitalism, the exuberance of the Stock Exchanges... and the absence total inflation. The word itself, in its monetary meaning today, only appeared in France in 1914: the thing did not exist before the war of XNUMX!

The central banks, the American Fed, the ECB and the Bank of Japan, certainly succeeded in curbing the risks of deflation, this simultaneous fall in prices and economic activity, which had caused the political catastrophes of the 1930s. major fundraisers are unable to boost consumer prices at the rate of 2% that they consider optimal. They ran the printing press like mad sorcerer's apprentices. The full employment enjoyed by the United States and much of Europe should logically push wages and prices up. Nothing works. Other forces combine to calm things down: globalization and competition from China, the aging population, the digital revolution and the precariousness of employment it fosters. Should we resign ourselves to the very weak price increases, around 1% per year, which are our lot?

● Abnormal price weakness

The press conferences of the President of the European Central Bank do not claim to be parties of giggles. And yet each time Mario Draghi explains learnedly, with his Buster Keaton stare, that "the mandate of the ECB is to keep consumer price inflation below, but close to, 2%", we believe we are diving into a wacky universe where words take on a completely different meaning than in ordinary life. .

The essence of a central bank, we learned, is to defend the value of the currency it issues and therefore “price stability”. This is, moreover, the official mission of the ECB in Europe (Article 127, paragraph 1). But for Mario Draghi and the other governors, stability does not mean that prices remain on average at the same level, but that they increase at a rate close to 2%! An almost universal standard, which all the major central banks on the planet have ended up adopting.

“It is difficult to measure inflation exactly, but experience and theory show that the numbers tend to be higher than the reality”

ECB Vice-President Vitor Constancio

German public opinion protests that the ECB does not define stability by zero progress. “It is difficult to measure inflation exactly, but experience and theory show that the numbers tend to be higher than the reality. When statisticians say that inflation is at 0%, it is highly probable that we are below it”, recently retorted Vitor Constancio, the vice-president of the ECB to a question from the German newspaper. Börsen-Zeitung. We must therefore give ourselves a precautionary margin to avoid the deflationary trap. This is all the more necessary in the European Monetary Union, a quasi-federation of states: zero inflation on average would mean that some countries would be in negative, in depression, we judge at the ECB.

However, since the end of the financial crisis, we have remained everywhere well below the norm of 2%. Prices have only increased by an annual average of 0,2% since 2009 in Japan, by 1% in the euro zone, and by 1% for the American economy. Certainly the collapse of oil prices, which lost three-quarters of its value between 2014 and 2015 before firming up somewhat, worsened the general asthenia; the euro zone even recorded zero inflation in 2015!

However, the vagaries of black gold only play a secondary role. "The Fed, which prefers the indicator of underlying inflation (excluding commodities), has been below its annual standard of 2% for 100 out of 104 months since the crisis in the United States!" Calculates Andrew Kenningham , the chief global economist of Capital Economics. And to wonder: “Will inflation ever restart?”

● FED, ECB, Insee, they find it difficult to understand

All the certainties forged in the 1976th century, which was an extraordinary in vivo laboratory of all excesses, seem to be collapsing. "Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can only be generated by an increase in the quantity of money faster than that of production", declared Milton Friedman. The 1912 Nobel in economics, the pope of monetarism (2006-1930), had been very impressed by the depression of the XNUMXs which had put a quarter of Americans out of work; he blamed it on overly restrictive monetary policies. To the point of suggesting “helicopter” raining greenbacks on the crowd if such a situation were to be faced.

The idea was taken up, not literally but transposed to the printing press, the day after the Lehman Brothers crash of 2008. Frightened at the idea that the United States could return to depression, Ben Bernanke, the president of the Fed, flooded the US economy with liquidity, more than doubling the central bank's balance sheet. This easy money has brought joy to Wall Street (the Dow Jones index has more than tripled since its abyss in the winter of 2009), but consumer prices remain becalmed.

Inflationary mechanisms seem to have become as impenetrable as the mysteries of the common cold

Faced with the major slippages of the years 1965-1982, the Prime Minister Raymond Barre, "the best economist in France" according to President Valéry Giscard d'Estaing, then explained the phenomenon "as an excess of purchasing power of individuals in relation to the goods made available to them". Unfortunately, this common-sense definition no longer works in France in 2017. As "growth begins to come up against the productive capacities of the French economy", points out Emmanuel Jessua, of the Coe-Rexecode institute, these limitations of the should normally boost prices. But this is not at all what we observe; French inflation (1,1% over the last twelve months) remains one of the lowest in the entire euro zone (1% on average, and 5% in Germany).

Inflationary mechanisms seem to have become as impenetrable as the mysteries of the common cold. Don't doctors usually say "a cold that goes untreated lasts seven days, and heals in a week when treated?" In the end, Ms. Michu has much clearer ideas than INSEE, whose definition is tautological to say the least: “Inflation is the loss of the purchasing power of money which results in a general and lasting increase in prices” . With this clarification which adds to the confusion: “To assess the rate of inflation, the consumer price index (CPI) is used. This measure is not complete, the inflationary phenomenon covering a wider field than that of household consumption,” according to INSEE. Understand whoever wants. And yet it is not the explanations that are lacking.

● The decalogue of a new world

Although it is the great mute of the economic scene, including in emerging countries (barely 1,6% over the last twelve months in China), inflation is nonetheless the keystone on which all the driving forces of globalization and the digital revolution. “The absence of inflation in 10 explanations”: this is a veritable decalogue recited by Bruno Colmant, chief economist at Bank Degroof Petercam and member of the Royal Academy of Belgium. It has the merit of being exhaustive:

1 – After the excesses of the 1970s, “the great moderation”: central banks and rigor took power.

2 – The Aging of the population induces a rise in savings.

3 – The digital revolution and artificial intelligence are destroying jobs.

4 – The world has entered a “secular stagnation” of low growth.

5 – The “great recession” of 2008-2009 left jobs insecure for a long time.

6 – Social inequalities exacerbate hoarding behaviors.

7 – The public debt forces savers to anticipate tax increases.

8 – In the euro zone, crisis management has been done to the detriment of employment.

9 – Multinational companies no longer have debts and are net lenders (Apple).

10 – E-commerce and Amazon intensify price competition.

These structural changes outline a new world where national inflationary pressures are diluted in globalized competition, where the bargaining power of trade unions has been shattered by technological transformations having the force of law.

Central bankers are the first to worry about it, because their traditional benchmarks are fading. The links between unemployment, the evolution of wages and prices have broken down. Yet they were their raison d'être as bogeymans.

● The best and worst things

"The Phillips curve has flattened," acknowledged at the Jackson Hole symposium (late August) Janet Yellen, the president of the American Fed. The expression seems sibylline, but you have to know it because central bankers no longer swear by the economist William Phillips (1914-1975). He was the first to establish an inverse relationship between the unemployment rate (on the abscissa) and the inflation rate (on the ordinate): the lower the former, the more wages (and prices) rise, and vice versa.

For its part François Villeroy de Galhau expresses the same concern, even if the Governor of the Banque de France does not refer to Phillips by name: "We are convinced that the usual sequence between growth, wages and inflation is at work, even if it will take longer longer than before”.

Even if the Phillips curve were less arched, but if it became completely flat, it would be a nightmare for central banks, who would then have no control over anything. The situation has become particularly embarrassing for the ECB, which no longer knows where to turn. "It is not impossible that the underlying inflation of the ECB will never return to the vicinity of the 2% target even if full employment is achieved," warns Patrick Artus. The chief economist of Natixis alludes to the tensions of the labor market observed in several countries of the euro zone including Germany. Even in France, 42% of business leaders tell INSEE that they have difficulty recruiting competent staff.

The absence of inflation is the best and the worst thing. The dream for consumers, and a source of blockage for all the others, whether they are central bankers or simple employees.

Source: ©  Will inflation stay very low forever?

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