Rapid technological advances cut inflation only marginally and temporarily, Bundesbank President Jens Weidmann said on Monday, weighing in on one of the biggest debates in modern central banking.
With much of the industrialised world struggling with anaemic inflation levels, some economists argue that rapid technological development keeps a lid on prices, forcing central banks to exhaust their firepower fighting an economic paradigm shift, and leaving them with few tools for the next downturn.
But Weidmann, a powerful voice on the European Central Bank’s rate-setting Governing Council, argued that a deep economic crisis a decade ago and the slowness of the recovery are the main culprits – not the start of the digital age.
“The inflation dampening effect of digitalisation is likely to been rather small so far,” Weidmann said in the German town of Freiburg, adding that even this minor impact was a one-off during an adjustment process.
“In the new long-term state of equilibrium, the potential for price reductions will be exhausted and its influence on the inflation rate will have disappeared,” he said.
Euro zone inflation has undershot the ECB’s target of almost 2 percent for five years, even with years of stimulus, raising questions as to whether monetary policy remains effective.
But ECB chief Mario Draghi has also dismissed many of the arguments about a paradigm shift, arguing that the euro zone economy is still taking up hidden slack, and that it is therefore too early to throw out established economic models.
A problem with low inflation is that it reduces what is considered a natural interest rate, so a central bank would have reduced room to cut borrowing costs in a downturn.
Some have argued for a higher inflation target as a way to raise price expectations, which would then naturally increase inflation and thus interest rates.
But Weidmann flatly rejected this suggestion.
“I am convinced that we should continue to aim for an inflation rate below, but close to, 2 percent over the medium term and should not raise doubts about the credibility of our monetary policy.”