As for the “money” created by QE – reserve deposits held by commercial banks at the central bank – there’s a very important difference between this and the “money” in simple textbook accounts of inflation: those reserves pay interest. If QE had been financed by the zero-interest money of the textbook, and if inflation subsequently went up, the real value of the public sector’s liabilities would decline, even if nominal interest rates and bond yields had risen in anticipation. Some portion of the public sector’s interest-bearing liabilities would’ve been replaced with a “money” that bears none. When reserves pay interest  Chart 1: Rapid inflations are often fiscal events  that’s no longer the case. This is why it’s not strictly correct to say that QE “monetises” the government’s debt. The policy is more accurately seen as a maturity swap, in which one (longerterm) interest-bearing liability of the state is replaced with another, shorter-term version of the same. As we’ll see, the shortening of their average  From “This Time Is Different: Eight Centuries of Financial Folly” by Carmen M. Reinhart and  maturity reduces the scope  Kenneth S. Rogoff. Copyright © 2009 by Princeton University Press. Reprinted by permission  for inflation to reduce the real  of the publisher. value of the public sector’s liabilities. Whatever the fiscal consequences of higher inflation today, and whatever they were in the past, it’s clear there are many examples in economic history of unsustainable fiscal positions leading to a wholesale loss of monetary control.
Particularly notable was the higher inflation in components relating to expenditure on transport, household equipment and maintenance and, especially in Spain, recreation, hospitality and tourism.4 The economic projections for the euro area have undergone significant revisions, with growth revised down and inflation revised up The recent escalation in the energy dispute with Russia has cast a shadow over the economic picture. This leads us to believe that the inflationary episode will be more intense and longer lasting, and that the economic growth outlook for the euro area will continue to soften. These circumstances have led to a significant revision of the economic outlook for the euro area in the ECB’s latest projections exercise. These forecasts include the surprises in terms of inflation and activity, and also the potential impact of the escalation of the energy dispute with Russia, as well as a revision of other technical assumptions, such as a greater depreciation of the euro. In this respect, one of the main changes in the ECB’s September projections exercise compared with that published in June are the assumptions relating to gas prices. First, the outlook for gas prices is revised up in accordance with gas futures prices. Second, and for the first time, a degree of gas rationing, albeit moderate, is assumed. This would be more significant in the countries that are most heavily dependent on Russian natural gas imports, which could even see some production cuts in the winter.