Two Months After Saying "Deflation Isn't Going To Happen" ECB Warns "Negative Inflation" Is Coming

Remember when on the last weekend of October, the ECB released the results from its latest farcical stress test, which contained the following pearl: "within the massive 178-page Stress Test document, there is a "whopping" 4 mentions of the word inflation (deflation appears just once). Here is what the "Stress Test" does say about inflation: "... while the adverse scenario does not strictly embody a prolonged deflationary environment, it does entail material downward pressures on inflation. Thus, the scenario leads to annual inflation rates for the euro area below the baseline rates by 0.1 percentage points in 2014, by 0.6 percentage points in 2015, and by 1.3 percentage points in 2016. The implied adverse inflation rates amount to 1.0% in 2014, 0.6% in 2015 and 0.3% in 2016."

But the real stunner came in the press conference in which the ECB Vice President Vitor Constancio had this to say:

My question would be on how credible these tests are. Looking at the adverse scenario, you haven't even included deflation. You have not included an interruption in gas imports to Europe. You have not included full-on sanctions on Russia. So please elaborate and convince us.


Constâncio: The scenario for the stress test was published earlier in the year, so some of the things you mentioned would not have been considered. But indeed, what was considered is a severe shock being the growth of other countries. If you look to the scenario, you see that for the US, there is also a big deceleration of growth which is part of the scenario and also for other countries that are the markets of the euro area. So that is embedded in those assumptions of indeed a big drop in external demand directed to the euro area. That's the first point. The scenario of deflation is not there because indeed we don't consider that deflation is going to happen.

We promptly reacted to this ludicrous "assumption":

So.... wait a minute. Just because the ECB, in all of its brilliance does not think a scenario is possible is precisely the necessary and sufficient reason to not include it in the stress test!... Uhmm, guys in Frankfurt: here's a tip - the quote-unquote Stress Test, and especially its adverse scenario, is precisely there to "assume" everything that you don't consider is going to happen!


Because how do you rebuild confidence in a system in which the market is telling you deflation is the most likely outcome, and yet you fail to even model for it because, drumroll, you want to rebuild credibility, however by only modeling what you, and not the market, "consider will happen"!?

So what happens less than two months later on December 20, 2014?

This: "European Central Bank Vice President Vitor Constancio said in a magazine interview he expected the euro zone inflation rate to turn negative in the coming months."

Bloomberg adds: "The oil price decline doesn’t create a simple situation for us in the short-term" ECB Vice President Vitor Constancio cited as saying in interview with Wirtschaftswoche printed in German. As a result, he said that "We now expect a negative inflation rate in the coming months." 

We love semantic games as much as the next guy, but even we can't help but observe that the official definition of "negative inflation" is....

And the punchline: "That’s something every central bank has to look at very closely.”

But... but... but.... just two months ago YOU SAID there is no need to look at "that" because - lo and behold - the ECB in all its infinite idiocy, doesn't "consider that deflation is going to happen."

And that is why, with "brilliant" central-planning academics such as this one in charge of micromanaging everything, who have no clue what the real world is like, the world is doomed.