Inflation in the euro zone might never “converge sustainably” to below but close to 2%

We use the ECB’s own words, which it has recently repeated : for the central bank to normalise key interest rates in the euro zone, there would have to be “sustained convergence of inflation to levels that are below, but close to, 2% over the medium term”. We believe this might never happen: The recent rise in inflation in the euro zone is merely due to the increase in oil prices, which, even if it continues, will be much smaller than between 2017 and 2018; Unit labour costs in the euro zone are not accelerating, despite the decline in unemployment, and continue to rise at a slow pace (less than 1% per year); Growth in the euro zone is slowing under the effect of an important mechanism: because the indexation of nominal wages to prices is low, real wages fall as soon as inflation rises, which weakens growth and prevents inflation from picking up sustainably. Altogether, it is very possible that inflation might never “converge sustainably ” to a level below but close to 2%. If the ECB does not alter its behaviour, this means that it will never begin to normalise its interest rates, and therefore that it might no longer be able to stimulate activity in the event of a recession (which could be termed the “Japanisation” of the ECB).