The inflation puzzle in the euro area – it’s the trend not the cycle!
What’s happening to inflation and output in the euro area? The ECB has apparently lost the opportunity to raise inflation and price expectations have already been sliding because the last recession. A lot of the policy debate has centered on the flattening of the Phillips curve. Yet, as this column shows, estimations of the joint output-inflation process indicate a decline of both output potential and trend inflation as the utmost relevant components of the puzzle.