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GOLDMAN SACHS: Here are 2 good reasons why inflation left Europe and isn't coming back for a long time

Published by Business Insider on Fri, 11 Dec 2015

No matter what central banks do, it seems inflation is stuck at near zero levels.Central banks around the world have kept interest rates at record lows and bought bonds in the billions, but prices are refusing to budge.There are lots of different explanations, such as slow wage growth, falling oil prices and the rise of technology, but analysts at Goldman Sachs think that, in Europe at least, there are two major demographic factors driving the phenomenon.Essentially, Europe's population is too old and growing too slowly to drive up prices and inflation.Both factors lead to a long-term decline in the labour force, which leads to less demand for goods and services and lower prices.This is a big problem for the European Central Bank argue the Goldman Sachs economists led by Huw Pill and Dirk Schumacher. It's simply not set up to deal with demographic changes.Here's what they had to say (emphasis ours):Central banks, at least in theory, should adjust for the inflationary/disinflationary impact of demographic changes. However, central banks tend to focus on a 2-year horizon, leading them to ignore slow-moving factors. Moreover, central banks face difficulties in assessing in real time the net impact on trend growth from demographic changes.Here's what their projections look like for inflation, with the demographic factor low population growth added in. It looks like we're in for a 10-year stretch of low inflation:So, this means that ECB President Mario Draghi's hands will be tied on interest rates just this year and the next, as well as those of his successorsfor maybe decades to come. Here's Goldman Sachs again:First, the slowdown in population growth and the ageing of the population in the coming years should exert some disinflationary pressure in the Euro area. Second, the extent to which this will show up in the actual inflation numbers will depend on offsetting measures by the ECB. To the extent that the ECB will aim to offset the disinflationary impact, policy rates should, on average, be lower than otherwise.Join the conversation about this storyNOW WATCH: Animated map shows all the major oil and gas pipelines in the US
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