Draghi’s Inflation Yardstick Obscured by Oil: Chart of the Day

By David Goodman  

The slump in Brent crude oil to a five-year low could hardly have come at a less convenient time for European Central Bank President Mario Draghi.
Policy makers due to meet this week need to determine whether purchases of asset-backed securities and covered bonds are sufficient to achieve the ECB’s price-stability mandate.
As the CHART OF THE DAY shows, that effort may be hampered by the decline in crude prices, which has muddied a market metric identified by Draghi as a benchmark for the inflation outlook. By that measure, consumer-price expectations fell yesterday toward the lowest level since Bloomberg began compiling the data in 2004.
“The collapse in oil prices is inevitably going to result in headline inflation rates around the world dropping,” said Michael Riddell, a London-based fund manager at M&G Group Plc, which oversees the equivalent of about $398 billion. “If headline inflation drops to zero or
below, even if it is ‘good deflation’ in the form of much lower energy costs, then I’d have thought Draghi and the ECB will feel a lot of heat.”
The five-year, five-year forward inflation swap rate, highlighted by Draghi in August at a symposium for central bankers, fell three basis points, or 0.03 percentage point, to 1.7475 percent as of 5:09 p.m. London time yesterday. It closed at a record-low 1.7225 percent on Oct. 15. The rate has been below the ECB’s inflation goal of just under 2 percent since September. Both five-year and 10-year inflation swaps fell to records yesterday.
The declines came as Brent crude touched $67.53 a barrel, the lowest level since October 2009, amid a slide in prices exacerbated by a decision from the Organization of Petroleum Exporting Countries to maintain output at current levels.