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European Central Bank chief Jean-Claude Trichet (FRANCOIS LENOIR/Francois Lenoir/Reuters)
European Central Bank chief Jean-Claude Trichet (FRANCOIS LENOIR/Francois Lenoir/Reuters)

Why is Trichet worried about inflation? Add to ...

Are you growing worried about inflation? If you've been reading the Wall Street Journal recently, you might be. Jean-Claude Trichet, head of the European Central Bank, raised his own concerns in a Monday article, printed in the Globe and Mail as well.

In the article, Mr. Trichet said he would raise interest rates to combat rising inflation, even when some European economies are clearly struggling with the debt crisis. His reasoning: Headline inflation has been on the rise, largely because of prices for food, energy and commodities. The rate jumped to 2.2 per cent last month, which is above the ECB's target of 2 per cent.

His warnings on inflation are being taken seriously, driving the euro higher on Monday. But if you want to hear the other side of the argument, mosey over to Paul Krugman's New York Times blog. There, Mr. Krugman notes that the ECB is being choosy about which measure of inflation it is highlighting.

"In particular, by switching back and forth between core and headline inflation, you can manage to find reasons to fear inflation, no matter what," he said.

Headline inflation takes food and energy items into consideration. Core inflation, though, strips out these volatile components. So, while headline inflation has indeed been on the rise in many economies, including the euro zone, core inflation remains tame. Indeed, the euro zone's core inflation rate sits at just 1 per cent.

This clearly baffles Mr. Krugman: "First of all, if headline inflation is The One, why wasn't the ECB all worked up about below-target inflation in 2009? Funny, I don't recall a lot of speeches about the need for monetary loosening. Why, it's almost as if the ECB switches between inflation measures to pick whichever one currently makes the case for tight money (a point Willem Buiter made a while back).

"Second, the ECB made exactly the same argument back in 2008, and raised interest rates even as the world was sliding into financial crisis. One might have expected Trichet to be a bit humbled by that experience. But I guess not.

"The ECB probably won't tighten just yet. But it's clearly gearing up to do the wrong thing as soon as possible."

Follow on Twitter: @dberman_ROB

 

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