Ebbing power

Draghi lacks arrows to hit ECB's inflation target

Euro zone consumer prices are falling. No doubt this will fan speculation that European Central Bank President Mario Draghi could be forced to ramp up asset purchases to hit his near-2 per cent inflation target. But higher prices might be beyond his gift.

Were the ECB not buying 60 billion euros worth of financial assets in the market every month, consumer prices might be falling by more than the 0.1 per cent annual rate reported for September - the first decline in six months. And Draghi can probably claim some credit for supporting euro zone economic sentiment, which hit a four-year high in September, according to a European Commission survey published on September 29.

But the ECB cannot fight the commodity cycle. Energy prices remained the biggest source of downward pressure on inflation in September, falling 8.9 per cent from a year earlier, according to the European Union statistics office. Other major central banks appear equally powerless. Japanese core consumer prices, which include oil but strip out fresh food costs, fell annually in August - the first such drop since the Bank of Japan deployed a massive stimulus programme more than two years ago, data showed on September 25.

Draghi's other handicap is that his asset purchases aren't yielding the sort of side benefits that had been expected. The euro has appreciated, both against the dollar and a trade-weighted basket of currencies, since ECB debt purchases began in March. That is hardly helpful for a central bank which could use the kind of imported inflation that comes from a weaker currency. Meanwhile, 10-year euro zone government borrowing costs have mostly risen, and the FTSEurofirst 300 index of shares has fallen.

Perhaps investors have grown sceptical about whether the ECB, or other central banks, can resurrect inflation when commodity prices are weak. That's certainly what is implied by the high degree of sensitivity which even long-range measures of market inflation expectations are showing to oil prices. If asset purchases have so little obvious impact on either inflation or financial markets, the only reason for Draghi to buy even more would be to deflect criticism that he is failing to meet his mandate.