INFLATING EUROPE / THE WALL STREET JOURNAL REVIEW & OUTLOOK

Review & Outlook
                                             
Inflating Europe

Rising prices aren’t the same as growth.

Updated June 2, 2015 7:43 p.m. ET

 

 

 

 

The eurozone’s return to something resembling inflation might create the impression that the European Central Bank’s monetary maneuvers are working. Headline inflation rose to 0.3% year-on-year in May from zero in April, and so-called core inflation rose to 0.9% from 0.6%—higher than before, although well short of the ECB’s target of close-to-but-less-than 2%.

These numbers need a few asterisks.

Cheerleaders for the ECB’s sovereign-bond-purchase program, or quantitative easing, point to some caveats suggesting the central bank should keep QE running at full tilt. Roughly one-third of the pick-up in headline inflation came as oil prices stabilized, creating less energy-price deflation.

The causes of the rest of the price uptick—mostly chalked up to 1.3% service-price inflation—remain obscure, although odd factors such as the prices of package holidays in Germany may have played an outsize role. The QE crowd is right that inflation is not entrenched, and the ECB is expected to stay the course on bond purchases at its meeting Wednesday.

The more worrying caveats are all the other ones. Many economic indicators are anemic at best. Unemployment is falling but not fast enough: On current trend it will take a decade for unemployment to return to its pre-2008 lows, according to economists at the investment bank Berenberg.

Growth in Germany, the eurozone’s largest economy, was relatively strong early this year but is faltering as exports have failed to roar back. Strong employment numbers there mask widespread underemployment as hours worked per employee are still below pre-2008 levels.

Business sentiment around the eurozone is either stuck in neutral or isn’t positive enough to fuel the economic growth Europe needs.

This is an echo of Japan, where two years of QE have contributed to some inflation but little growth.

Japanese households are paying higher prices for imports in particular, while employment and wages never picked up. At least Europe embarked on its monetary experiment as energy prices were falling, which is one of the best things to happen to the eurozone in recent years.

ECB President Mario Draghi presumably knows the problem, since he’s been the first to remind European leaders that monetary policy is no substitute for the labor-market, tax and regulatory reforms Europe needs. The danger is that reports of QE “working” will free policy makers from a sense of urgency over reforms.