by Karl-Friedrich Israel
Every once in a while economists want to go out on a limb with their models and publicly make forecasts on what the future rate of price inflation will be. The current COVID-19 lockdown is no exception. Many economists have warned us of potentially very high rates of price inflation, because monetary stimulus on a massive scale meets a negative supply shock. Others are afraid that the monetary and fiscal stimuli won’t be strong enough to compensate for the drop in private spending, resulting in a deflationary spiral. More often than not, both parties are wrong.
It seems important to ask what it is that they try to forecast and how closely connected it is to monetary policy interventions. When we look at the consumer price inflation rates in the eurozone, there really has not been much going on over the past decades, despite a rather activist monetary policy. Since 1999, the average annual inflation rate, measured by the Harmonised Index of Consumer Prices (HICP), has been about 1.65 percent.