Inflation figures to be rushed out to help ECB policy-makers

Date: 17/09/1998

By Tim Jones

ECONOMICS Commissioner Yves-Thibault de Silguy has authorised the publication of stripped-down inflation data vital to sound policy-making by the European Central Bank.

The early release of a single euro-zone inflation figure will be the centrepiece of an overhaul of the activities of the EU's statistical office, Eurostat, to be announced by De Silguy and the agency's Director-General Yves Franchet next Tuesday (22 September).

At the moment, Eurostat publishes a harmonised consumer price index (CPI) for the whole of the Union, together with a country-by-country breakdown, 30 days after the end of the month: far too late for the monetary policy experts at the ECB and the financial markets.

The new preliminary 'CPI-lite' will concentrate on the largest euro-11 nations and will publish a single inflation rate much earlier in the month. National breakdowns will be released later.

Early and reliable inflation figures are crucial to the ECB as it labours over what kind of monetary policy strategy to pursue. The bank is mandated to maintain 'price stability' in the euro bloc, but has still to decide exactly how it will achieve this.

The ECB's governing council, made up of the six-member directorate plus the 11 national central bank governors, failed to agree a strategy at a meeting late last week because representatives did not trust the quality of the data available to them.

ECB President Wim Duisenberg admitted afterwards that honing the strategy was turning out to be “rather more difficult than any of us had anticipated earlier”.

Monetary officials say that putting together a reliable measurement of the rate at which the quantity of money in circulation in the economy grows is proving troublesome.

Most members of the council want to use such a measurement as a guide for detecting oncoming inflation, but are alarmed at how difficult it is to construct a euro-11 'aggregate'.

Council members are following the advice of ECB chief economist Otmar Issing in opting for the 'broad' M3 aggregate, which measures banknotes and coins in circulation with the public, easily withdrawn bank deposits and debt instruments which can be quickly cashed.

However, Issing's team of economists is finding that variations in the definition of M3 in neighbouring countries are making the data unreliable.

They also have to make allowances for flows of money across borders. “For example,” said one official, “a reduction of M3 in France which is because of money flowing into Germany will not necessarily come up in the German figures, which do not include deposits by foreigners.”

Officials believe the persistent worries about the quality of the M3 data will persuade the ECB to opt for a mixed strategy, combining monetary targeting with straightforward prediction of the future inflation rate.

They also think that, unlike the German Bundesbank, the ECB will establish a 'monitoring range' for M3 growth rather than a set target, which could be breached if the aggregate turns out to be wildly inaccurate.

Duisenberg will outline the problems facing the bank in devising its strategy when he addresses the European Parlia-ment's monetary subcommittee next week.