NEW YORK—Being a central banker is a tough job. Even when things aren’t falling apart, people blame you for everything in the economy that isn’t perfect.
The problem in Draghi’s eyes is the old foe of the central bank: inflation.
“Central banks are unable to truly control the trend in inflation,” he said at a meeting at the Economic Club of New York on Dec. 4.
More specifically, he thinks that the ECB isn’t meeting its objective of price stability. For the layman, if there is no price stability, there must be lots of inflation.
It turns out, there isn’t any inflation in the eurozone: Prices only increased 0.1 percent in October compared to last year. Looks pretty stable to the uninitiated.
So what is Mario Draghi complaining about? The ECB’s definition of price stability is inflation of less than 2 percent in the Harmonized Index of Consumer Prices.
One could argue that already this target is off the mark, as stability in its strict sense means there is no change in prices at all—handy if you are making business decisions.
In the meeting, Draghi made it clear that price stability for him actually means having 2 percent inflation or even a tad above, and the central bank should work to achieve that target.
What he is most afraid of, however, is the opposite of inflation. In Draghi’s own words: “The risk of deflation is firmly on the table.”
So he and the ECB think the bank should work to avoid deflation and achieve at least 2 percent inflation, rather than have price stability as defined by the layman and also in its own objectives.
For consumers and businesses, price stability is great. It makes planning easier, and certainty in outcomes always improves productivity.
For Mario Draghi and his fellow central bankers, however, price stability of deflation is not good because it increases the value of debt in real terms.
For various reasons, his approach of quantitative easing doesn’t achieve the desired effect—and that’s what he is complaining about.