Food Price Spike Raises Questions Over ECB Inflation Gauge

(Bloomberg) -- A sharp increase in food prices in European supermarkets since the coronavirus outbreak has researchers wondering whether central bankers are looking at the right inflation measure when setting monetary policy.

If food prices continue to grow at the rate recorded between Feb. 1 and April 20, they’d stage a 3.8% increase this year, according to calculations by economists at the University of Hohenheim based on online supermarkets. Shortening the time frame for the data implies an even bigger price spike.

At the same time, about one third of the region’s basket of expenditures are goods and services that are virtually unavailable because of lockdowns, Hans-Peter Burghof, Jan Swiatkowski and Marius Puke wrote, pointing to recreational and cultural activities, restaurants, hotels and transportation.

“A systematic distortion of the index could therefore trigger a faulty monetary policy, or legitimize it in the public debate if it was consciously pursued,” they wrote, adding that price developments ahead will hinge significantly on how the pandemic evolves.

The study comes amid a debate about whether the massive fiscal and monetary stimulus unleashed in response to the pandemic could eventually cause a pickup in inflation. The euro area’s official rate fell to 0.4% in April from 1.4% at the start of the year, and the European Central Bank expects it to “decline considerably further” in the coming months.

Philip Lane, the ECB’s chief economist, said in an online discussion on Wednesday that his staff has looked at changed spending patterns and their impact on inflation.

“There are some forces raising the inflation rate, some forces lowering the inflation rate,” he said. “So in the overall scheme of things, it’s not really having a dramatic effect.”

Inflation could pick up in the future if disrupted global supply chains can’t keep up with rising demand, he added.

“Initially, the negative demand effect is more dominant, though I keep an open mind about that supply effect kicking in over time,” Lane said. “I don’t rule out that that effect is there.”

Policy makers have added a 750 billion-euro ($813 billion) bond-purchase plan and new bank-lending programs to their toolkit to make sure credit keeps flowing to companies despite lockdowns, and the economy recovers to produce inflation rates closer to 2%. Governments across the region have also pledged hundreds of billions of euros in support.

The research “casts a critical spotlight on the central bank’s monetary policy,” the university economists concluded. “Does the evolution of the value of money really allow for so large an increase in money supply? And what political alternatives are there, if it’s not the case?”

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