If you read Larry Summers in the Financial Times, you know that recent data confirm falling prices in the euro zone. Summers argues that the deflation indicates global stagnation, though we find disagreement on the appropriate interpretation. For some it is no more than the transitory effect of falling petroleum prices.
The focus on petroleum prices indicates the analytical limitations of,composite price indices for understanding what is unfolding in the euro zone. A professed function of these indices is to serve as an indicator for central bank inflation targeting. The relationship is well-known.
Central banks take a rise in the composite price index above some arbitrary guideline to indicate the need to increase interest rates. The increase in the central bank rate allegedly curtails credit growth and dampens inflationary pressures.
Even should one believe the interest rate to inflation causality, a composite price index is not the appropriate indicator for central bank action be it measured for consumers, producers or GDP as a whole.
Composite indices all mislead more than they inform.
The misleading effect of composite prince indices is especially serious for the euro zone. First and most obviously, euro zone price indices conceal variations in inflationary pressures across member countries.
Read more: Euro Deflation And How To Interpret It
The focus on petroleum prices indicates the analytical limitations of,composite price indices for understanding what is unfolding in the euro zone. A professed function of these indices is to serve as an indicator for central bank inflation targeting. The relationship is well-known.
Central banks take a rise in the composite price index above some arbitrary guideline to indicate the need to increase interest rates. The increase in the central bank rate allegedly curtails credit growth and dampens inflationary pressures.
Even should one believe the interest rate to inflation causality, a composite price index is not the appropriate indicator for central bank action be it measured for consumers, producers or GDP as a whole.
Composite indices all mislead more than they inform.
The misleading effect of composite prince indices is especially serious for the euro zone. First and most obviously, euro zone price indices conceal variations in inflationary pressures across member countries.
Read more: Euro Deflation And How To Interpret It
