ECB’s Draghi takes up new weapon in war on deflation

Runners have target times, golfers judge themselves by their swing, while Mario Draghi watches a technical measure of inflation expectations used by financial markets. Just one problem: it suggests the European Central Bank president is not achieving his objective – and that markets’ fears of eurozone deflation are mounting. Since late August, investors have focused on a financial gauge previously watched only by specialists – the ‘five-year, five-year euro inflation swap rate’. That is the average level of inflation that swaps prices imply over five years starting in five years’ time. Inflation swaps are used to protect investors against inflation. Draghi had highlighted the inflation swap rate when he addressed a global summit of central bankers in Jackson Hole, Wyoming. In a big hint of a fresh ECB effort to stimulate eurozone growth, he noted that the gauge had fallen sharply. Central bankers have long used the measure. In 2002, Jean-Claude Trichet, then head of the Banque de France and later Draghi’s predecessor at the ECB, commissioned research into whether inflation-linked bond and swap markets could produce a measure of inflation expectations for policy makers, according to ft.com