Hello, I am new here and trying to self-study economics a bit.
Now the past 2 years i have always been puzzled about the dramatic reactions to inflation numbers at what seemed to me the wrong moments.
I am from the Netherlands and using the numbers from my country, but this seems to be representative for the rest of europe.
My main issue is that the inflation numbers compare the current month, to the same month last year. Late 21 and early 22, the inflation number went up dramatically. In the beginning, when it went up with like 2% per month but was not yet high, there was no panic and i didn’t understand why not. Late 22, it was going down but still high and people were still people panicing and i didn’t understand why. The declining numbers actually indicated there was no inflation anymore even though the number was still high. You can also easilly recognise the relation between the downhil and the uphil of the inflation peak. The downhil is almost a perfect inverse of the uphil, which is 100% logical the way these numbers work.
I have put this in numbers in excel. I hope pasting the picture here works out. So the first column is the official inflation numbers for the years 21,22,23. The second column is the number added to the one from the same month last year. Turning it into a price index where dec2020 = 0. So we have had 17.3% price increase over those nearly 3 years.
If you look at that righthand collumn, you see that the inflation number was rising rapidly until Sept 22. Since then the price level has remained pretty much stable. (and based on this list, i make the prediction that inflation for nov will go up to 2.5-3% and it will stay there for a few months, it has to go up to make up for the decline from oct-nov in 22)
Now the most puzzling thing of all this is that most of the ECB interest rate hikes came AFTER the actual inflation had already subsided.
The globe is missing China’s economies of scale in manufacturing as a global deflationary force. Until the factories in the US and Mexico become those forces again we will have inflation.
The rule of 72 applies. Divide the inflation rate into 72 and you have the doubling time in years of the price of goods and services. That is worrisome.
The question basically is: How is it that the ECB started raising interest rates AFTER the inflation and thus doesn’t seem to be the cause of the inflation going down at all.
That is called being behind the curve on inflation. Rates are then raised to slow the economy and keep the inflation rate from continuing to rise, making things worse.
There are, of course, things that central banks have no influence upon such as energy prices, government spending and the Chinese economy.
The inflation is a lack of economies of scale out of China. The US/Mexico will replace China’s influence on inflationary forces.
Better put hiking rates is now having a more limited effect. Actual increases in factory production in the West primarily the US and Mexico, along with the UK and Japan, will bring down the inflation rate.
You can not ask about inflation and then think it happens in a vacuum determined only by monetary policy. If that were the case there would be no need for any further monetary policy.
Others have already noted that central banks are sometimes slow on the trigger (or the gas), so I’ll leave that alone.
It’s also possible that a determination was made that the inflation you are looking at in the chart was not “core”, that is, reflective of things generally, but were affected by temporary spikes in price. Without spending time researching (my polite way of saying “I don’t know”) it’s possible that the inflation number was goosed by a sudden surge in energy prices or food prices, which tend to be volatile depending on geo-political situations or extreme weather events. There are also other causes, such as the temporary fiasco of supply chains as happened during the pandemic: people rushed out to buy certain things, which begat shortages, which begat price increases, which begat misallocation of shipping, which ended up with oversupply in some things and under-supply in others. Perhaps those kinks in the system worked themselves out.
There was a lot of talk that the inflation would be “transitory”, which to some extent it’s seems to have been, but longer than expected and with some follow-on effects (housing, rents, etc.)
Inflation can be a hydra-headed problem, which is why there are so many different measures of it. Don’t know which one you are using, nor which one is appropriate, but this gives you some background to continue you on your journey. HTH.
It kinda caused doubts in my mind if the ECB really actually has any significant control anyway. If this interest rate rise actually really does anything and if its actually even needed.
(though at the same time i have sat in amazement the past decade watching how many dollars and euro’s were created without the currencies losing all their value)
I guess at the ECB the see much more details to how the inflation is developing than i see. Its a bit of a bummer though, means i can’t just look at inflation and predict what they will do
