Sober Look has the numbers, for instance:
The area’s CPI is now below 0.5% on a year-over-year basis. Yesterday we saw German CPI hit new lows (see chart) and Italy’s inflation rate is now hovering just above zero.
What is the most economical model here? The ECB invested in building up a lot of credibility in some areas, such as price level stability, but that means less credibility when it comes to pushing higher inflation. So to get two percent inflation, perhaps the ECB has to genuinely and truly seek four percent inflation, because a big chunk of the market won’t believe they really want four percent. Four will get them to two.
The ECB in fact may be wishing for two percent price inflation and getting…less than that. Which in turn conditions market participants to doubt the commitment of the ECB to the rates of price inflation which it claims to be seeking. The ECB and the citizenry can get stuck in a self-fulfilling prophecies equilibrium, yet without requiring a standard liquidity trap.
I don’t by the way think of this as a time consistency problem. The ECB doesn’t want to be in a position where it is genuinely shooting for four percent inflation, even if that means it will end up imposing only two percent on the Germans. They are still caught with their proverbial pants down and their internal culture of inflation love would be seen as unacceptable and illegal too. Yes, the ECB is selfish, and law-abiding as well, as its charter mandates price stability as the goal.
And you know what? When “selfish” and “law-abiding” point in the same direction, that is very often what you will get.