A short tale of two central banks and (roughly) one inflation rate

May 19, 2015

Euro zone inflation rose to zero in April from -0.1 percent and in Britain it fell to -0.1 percent from zero, the first negative reading since the 1960s.

No matter what differences may exist between these two economies, and no matter how clear that inflation will soon rise because of oil prices and a lower base from which to compare any future change, nobody can dispute that is pretty much the same inflation rate.

Both the European Central Bank and the Bank of England are struggling to get inflation back up to 2 percent, which they target over a longer horizon.

Consider how:

  • The ECB is buying, and has committed to keep buying, 60 billion euros worth of mostly government bonds until September 2016. It has said it may go beyond that date.
  • The BOE bought 375 billion pounds worth of gilts over a 2-1/2 year period that ended nearly three years ago. It has suggested, based on its most recent inflation forecasts, that it will need to raise rates from a record low¬†in about a year from now.

Can both central banks really both be holding the right policy to bring inflation back up to 2 percent?

Are either of them actually in control of where inflation goes?

Inflation

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