The ECB's Oil Price Trap

European Central Bank President Mario Draghi Speaks in Berlin
Mario Draghi faces a tricky decision if oil prices continue to rise.
  • Why it matters

    Why it matters

    If the price of oil were to increase to $80, euro-zone inflation would likely rise above the 2 percent “price stability” threshold. That could hurt growth.

  • Facts


    • OPEC oil-producing states agreed last month to cut production, which means significantly higher oil prices are probable.
    • The treaty on the functioning of the European Union charges the ECB with ensuring price stability.
    • There is a risk of deflation when inflation remains appreciably below 2 percent.
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Economic policy is normally used for a prescribed goal, such as reducing long-term unemployment.

The political debate then revolves around what are the best instruments to achieve that objective. For cutting joblessness, for instance, shorter working times for everyone, a lower minimum wage or measures to increase qualifications might be suitable.

If, on the other hand, you look at economic policy of the European Central Bank, the path itself appears to be the goal — namely, negative interest rates and massive bond buying.

The ECB economists are well aware that consumer price inflation is influenced to a large degree by oil prices. Even if low oil prices persist, inflation will likely increase in the euro zone from the current 0.4 percent rate to about 1.2 percent early next year.

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