Duncan Wheldon Looks at the Eurozone Outlook

The very thoughtful Duncan Wheldon: Inflation, Macroeconomics, and the Dress, wrote:

The big question in the coming months (especially in the Eurozone) is whether the positive income shock from lower commodity prices is enough to boost aggregate demand by enough to turn around a longer running disinflationary trend. For the time being, that looks to be the case. At the moment the current ‘deflation scare’ in the West looks to be just that — a scare. To see if it’s really something to worry about, we need to look away from headline CPI and focus on core inflation and wage growth.

And? Do we get to look at that in the next serial episode?

It is certainly true that we have not since 1979 had an episode in which an oil-driven jump in headline price inflation has fed through via any sort of expectational mechanism into a persistent shift in core inflation or in wage inflation. As I read history, that was because A.V. (After Volcker) investors, businesses, and workers trusted (or feared) central bankers to keep nominal aggregate demand roughly on track over time no matter what happened to oil prices. But after the massive undershoots of 2008–2015 is this still true?

It is still only a risk. But I wouldn’t call it a “scare”. “Scare” implies that it really is not a risk, and I do not see how we can conclude that right now.