Oil prices.
Recent developments of oil prices have sparked various debates in relation to the European Central Bank's inflation objectives and its efforts to achieve the 2% threshold.
My perspective as a consumer, especially an unemployed or low income one, is that if those reductions are projected upon private transportation gas tanks then we already save a few € on a monthly basis, most probably directing it to consumption, especially that of products of necessary daily use, without excluding savings as an option. Since most of the products that additional money are spent have already inelastic Demand, then consumer price inflation index (CPII) is not really expected to change, at least theoretically.
Supply side possible effects.
Now, on the Supply side, reduced oil prices may result to improved profit margins along the supply & distribution chain. The way those final shares are actually formed is not within the scope of this article. Next, I distinguish two main outcomes, at least of public interest.
- Some of the margin gains are passed to the end consumer prices, actually further reducing the CPII((Consumer Price Inflation Index)) adding to the one produced by low oil prices. This is a positive development for the consumer purchasing power along the additional € savings already above mentioned.
- The Supply side may achieve an increased profitability which may give a boost to a certain extent to investment and wages. Increased wages though may not be a main trend for as long as the unemployment rate is high on national level.
€ Exchange rate implications.
Although all the above are significant developments, the last years we are used to witness a strong weight of finance on decision making. That for, it is very important to write a few thoughts on the € exchange rate and possible consequences, welcome or not.
As far as I am concerned, the most important factor is the rate of € exchange rate "displacements" over the respective export prices ones. This would provide a good argument on what to anticipate by the industrial exports oriented production level. I mention it here because it affects many other parameters taken into account when financial decisions are made. A stable or even stronger exchange rate may function as a capital inflow incentive, resulting to better capital ratios (leverage) for Credit Institutions and more loans for investments, especially when CPII is not predicted to increase significantly.
My analysis so far has not found any indicators showing a significant increase of CPII in the near future. A near stable € exchange rate will also empower this argument. Actually, if my proposal to the European Central Bank was accepted, then it would be possible to achieve at least a stable or even better increased purchasing power for the Supply side while also maintaining a strong recovery pace for the labour force. An improved Supply side purchasing power would produce for a certain period of time a loop of the previously presented arguments, since natural resources, materials and industrial equipment would be within reach for much less.
The challenges the economic area of € faces, were long time ago anticipated, making its implementation even more urging as all other options were widely considered inferior. The reason is that a Europe wide single market provide a consumer base that may sustain its production base during a financial and economic crisis, if handled correctly.
Closing argument.
The arguments presented so far, are what I think is more important to take into consideration by my perspective. It is not an exhaustive analysis, nor an inclusive or conclusive one. For each of my derived outcomes another economist may object a different one.
Finally, up to this moment the Euroepan Central Bank has not directly answered my proposal, so I consider it as rejected.