An Interesting Ad-Lib from ECB Head Mario Draghi’s Jackson Hole Speech: Morning Comment

Joe Weisenthal notes Lorcan Roche Kelly of Agenda Research on an extended ad-lib in Mario Draghi’s Jackson Hole speech. Ad lib emphasized; things in the text not mentioned struck through:

Inflation has been on a downward path from around 2.5% in the summer of 2012 to 0.4% most recently.

I comment on these movements about once a month in the press conference, and I have given several reasons for this downward path in inflation, saying it is because of food and energy price declines; because after mid-2012 it is mostly exchange rate appreciation that has impacted on price movements; more recently we have had the Russia-Ukraine geopolitical risks, which will also exert a negative impact on the euro area economy; and of course we had the relative price adjustment that had to happen in the stressed countries as well as high unemployment. I have said in principle most of these effects should in the end wash out because most of them are temporary in nature–though not all of them.

But I also said if this period of low inflation were to last for a prolonged period of time, the risk to price stability would increase. Inflation expectations exhibited significant declines at all horizons. The 5year/5year swap rate declined by 15 basis points to just below 2%–this is the metric that we usually use for defining medium term inflation. But if we go to shorter- and medium-term horizons, the revisions have been even more significant. The real rates on the short and medium term have gone up, on the long term they haven’t gone up because we are witnessing a decline in long-term nominal rates, not only in the euro area but everywhere really.

The Governing Council will acknowledge these developments and within its mandate will use also unconventional all the available instruments needed to ensure price stability safeguard the firm anchoring of inflation expectations over the medium to long term.

The speech text says:

1. The ECB knows that inflation has declined.
2. The decline in inflation has not led to any decline in expectations of inflation.
3. THE ECB will, if necessary, within its mandate, use QE and other policies to keep expectations of inflation from declining.

The speech as delivered says:

1. The ECB knows that inflation has declined.
2. My usual line is that the decline in inflation is due to temporary factors that will be reversed.
3. That explanation is now long in the tooth: the longer “temporary” lasts the greater the danger.
4. In fact, it is too late to “safeguard the firm anchoring of inflation expectations”.
5. Inflationary expectations have already declined.
6. We will use all the tools we have to reverse this.

Is this deviation a mere line wobble–Draghi going accidentally off-message either because of jet-lag or because his personal view is not the ECB consensus and some of the former leaked out? Is this deviation an audience effect–Draghi seeking to give a speech pleasing to his West Side (of the North Atlantic) audience and thus unimportant, since he will revert to the East Side message assuming his plane avoids Bárðarbunga? Or does it signal a recognition on Draghi’s part that the Eurozone is heading for a triple dip, and that if he doesn’t assemble a coalition to do much more very quickly to boost aggregate demand we will have to change the name “The Great Recession” to something including the D-word, and he will go down in history as the worst central banker since the 1930s?

I would like to know…