The meaning of the decline in the EMU's core CPI - BBH

"The eurozone reported a flash reading of its October CPI today, the last day of the month.  After softer Spanish and German national reports, it was not surprising that the headline eased to 1.4% from 1.5%.  ECB President Draghi has warned of some near-term softness due to energy prices," explain BBH analysts.

Key quotes:

"The unexpected news was that the core rate slipped back to 0.9% from 1.1%.  This matches the low from May.  The low this year and last was 0.7%, while the cyclical low was 0.6%."   

"To be sure, the ECB does not formally target the core rate.  Nevertheless, it is operationally clear that it matters to policymakers.  It helps inform the judgment that inflation is not yet on a sustainable path toward the target, and is the primary reason why the ECB seemed unanimous in extending it asset purchases well into next year."   

"Draghi suggested that there was some disagreement on whether to leave the purchases open-ended or announce, that barring some new shock, an end date.  A newswire reported that there might have been five dissents from the decision to keep it open-ended.  This group of five represents the hawkish wing of the central bank.  It appears to be composed of central bankers from Austria, Estonia, the Netherlands, and, of course, Germany." 

"Is tapering in Q4 18 from 30 bln a month to zero the difference between competent and incompetent management of monetary policy?  If buying more than 2 trillion euro of assets produced a certain response would topping it off with say another 60 bln euros make a significant difference?  We answer both questions in the negative."    

"Nevertheless, the dissent is important.  First, it offers a crystallization of a hawkish wing at the ECB.  They are the usual suspects (Germany, Austria, and the Netherlands). Hansson (from Estonia) comments had also shown his leanings.  There may be a one or two others that might side with the hawks but disagreed on this particular tactical issue. In the current environment, the hawks are a minority, but one whose power and influence is arguably greater than its numbers."    

"Second, the dissents may not have been so much about the tactics of tapering.  The dissents were a proverbial shot across the bow.  It was a warning of the post-QE struggle for the soul of the ECB.  Will it revert back to the Bundesbank's ordoliberalism, which Draghi said is part of the central bank's DNA?  Or given the TLTROs that will be outstanding for several years, open-ended reinvestment of maturing proceeds, and the sheer size of the ECB's balance sheet has the ECB's DNA changed?"   

"There has been much focus on the pending significant changes of personnel at the Federal Reserve's Board of Governors.  Similar and profound changes are coming to the ECB, but they are more stretched out in time than the changes at the Fed.  In the middle of next year, the vice president's term ends.  The choice here could paradoxically influence that the succession of President Draghi in 2019.  Also, in 2019 Praet's and Coeure's terms on the executive board of the ECB's end.  That means in the four of the six executive board members will be replaced in 2018 and 2019."