Dwindling inflation puts pressure on ECB

By James Saft

Never a hot-bed of monetary policy activism, the European Central Bank may soon find itself forced into an uncomfortable period of experimentation.

At issue is inflation, or rather its increasing scarcity: eurozone inflation fell at its fastest ever month-on-month pace in January, down 1.1 percent from December. Only three small countries, Estonia, Slovakia and Latvia, saw consumer prices rise in the month, with the rest flat or in outright deflation. Annual inflation came in at 0.8 percent, far below the ECB's 2.0 percent target and slightly below economists' expectations.

Indeed with Germany seeing a month-on-month decline in prices, the supposed contrast between a healthy core and sclerotic periphery is harder to see, at least in inflation terms.

"The disinflation trend is broad-based across the eurozone. All countries are contributing to lower inflation. It is not just the internal devaluations of program countries that are pushing euro zone inflation down,» Andrew Bosomworth of Pimco wrote in a note to clients, referring to countries like Greece and Ireland which are following programs of economic reform which have wage, living standard and price compression as unwanted side effects.

Just think what might happen to prices if France and Italy were to some day actually launch the economic reforms they've been threatening these many years.

So far ECB head Mario Draghi, using a narrower definition of deflation, is sounding not exactly like a man ready to pull the trigger on rate reductions or other extraordinary monetary policy.

"We don't have any evidence of people postponing their expenditure plans with a view to buying the same thing at lower prices, in other words we don't see what is defined...