What's going on?

The chief economist of the European Central Bank (ECB), Peter Praet, argued on Monday that while the ECB�s policies are showing promising results, they cannot be pulled back yet because key economic metrics, such as inflation, aren�t at their desired level.

What does this mean?

As more activity within an economy occurs, prices should go up in response to the higher demand that�s been created (i.e. inflation should increase). Inflation has increased recently in Europe, but mainly because of the higher oil price rather than due to demand within the eurozone economy. The ECB�s chief economist made clear that increasing the �core� inflation rate (which excludes energy and food prices) closer to 2% remains a priority (Why is 2% the target? Click here).

Why should I care?

The bigger picture: There is not yet enough upward pressure on wages in Europe.

Praet says that one of the biggest reasons that inflation has not picked up sustainably is that there is still quite a bit of �slack� in the eurozone�s labor market. If there are still lots of unemployed (or underemployed) workers, then it makes sense that companies would be less willing to raise wages for existing workers. The hope is that economic growth will continue to improve and that this will increase wage growth further.


For the markets: The ECB appears to be resisting the idea that it should be withdrawing support for the economy.

Some investors look at the recent significant pickup in the eurozone�s economic growth and argue that the ECB risks remaining too supportive for too long. The risks of doing so include the potential that artificial �bubbles� get created (like, say, too many risky loans are made as lenders �chase� the higher interest rates that riskier borrowers will pay) and when interest rates finally go up, those bubbles might pop and endanger the overall economy. The ECB, however, appears to be more focused on ensuring that its policies push up inflation (excluding energy and food prices), which suggests no major changes to its policies any time soon.