In an IMF blog article titled “Euro Area Inflation: Why Low For So Long?“, the puzzle of the broken relationship of core inflation and unemployment was discussed. The study found that the key is “strong persistence of euro area inflation”. That is, for example, “coefficient on past inflation is high, much higher than for US inflation”. Also, “coefficient on inflation expectations is much lower for the euro area than for the US”.
In layman terms, the implication is that “in the euro area, following a period of weak demand and low inflation, it will take a much longer period of strong demand to get inflation back to the inflation objective”. Or in more technical term, ” there is a substantial time lag in the transmission of improving labor market developments to prices.”
The implication to ECB’s monetary policy is that it reinforces the case for being “patient, prudent and persistent”. And, that will “support the slow process of returning inflation to its objective, through both stronger demand and well anchored inflation expectations.”
