Changing Views on Inflation – John Cassar White
It won’t be much fun being a central banker in 2022. After years of singing the same hymn about inflation, some central bankers are starting to change their minds about the seriousness of the threat inflation poses to the country. Mondial economy.
After years of worrying about the risks of deflation, policymakers are once again faced with the dangers of high inflation. Growth prospects for countries that have relied on low interest rates for nearly a decade remain weak.
There is no doubt that the swift actions taken by central banks in early 2020 to keep interest rates low and purchase large amounts of sovereign debt to manage the impact of COVID on economies have helped preserve stability. financial and job preservation. Yet the collateral damage caused in part by this cowardly momentary strategy is the increasingly worrying rise in inflation.
Federal Reserve Chairman Jerome Powell and ECB President Christine Lagarde have tried to calm markets and politicians by claiming that the acceleration in the rise in inflation was “transient”.
Lagarde even predicts that by the end of 2022, inflation will start to fall again, while Powell begins to prepare the markets for an interest rate hike in the coming months.
It is essential to dissect the dynamics that push inflation up to understand how this phenomenon can be controlled. Inflation would come down thanks to a combination of lower energy prices, more efficient supply chains and tighter controls on consumer spending. But other factors may not attract enough attention.
The aging of the population in most Western economies creates labor shortages, especially in countries that still resist immigration from Third World countries. Labor shortages in the US and EU are driving up wages and there is no indication that this trend will be eliminated any time soon.
In addition, geopolitical tensions on the eastern borders of Europe and the worsening of Sino-American relations are also a cause of uncertainty which feeds the nervousness of the financial and energy markets with frequent price spikes.
The IMF is undoubtedly worried about the risk of runaway inflation. In its most recent review of the UK economy, the fund accused Bank of England interest rate policy makers of letting inflation soar by making excuses for doing nothing .
Central bankers have become experts at using tricked language so as not to scare the markets
The IMF says: “It would be important to avoid inaction bias, given the costs associated with containing the second round effects of inflation.”
The Bank of England responded by raising interest rates, the first major central bank to do so. The Federal Reserve is expected to start raising interest rates in 2022.
The risks of raising interest rates too early are very real today, as Omicron’s impact on most economies remains difficult to predict. The ECB faces the biggest challenges among central banks. While most central banks have already started to withdraw generous stimulus policies and prepare markets for tighter monetary controls, the ECB is still scarred by criticism for raising interest rates too soon after the crisis. 2008 global financial crisis.
Some central bankers have become adept at using spurious language to ensure that what they say does not unduly scare the financial markets. So what central bank leaders say in their press conferences does not always reflect their well-founded fears.
We must look elsewhere to understand how and when inflation risks reach a level that requires action to ensure that price increases do not erode family incomes.
Mohamed A. El-Erian, chief economic adviser at Allianz and president of Queen’s College Cambridge, is an outspoken. He calls a spade a spade when almost everyone feels inhibited from expressing their fears.
He recently said the Federal Reserve must act quickly to regain control of the inflation rhetoric, denouncing President Powell’s prior assurance that price increases are short-term. He argues: “The characterization of inflation as transient is possibly the worst inflation call in Federal Reserve history.”
It would be interesting to hear the latest views from El-Eiran and other respected economists on the ECB’s dovish stance on inflation.
Lagarde only recently pledged to “keep conditions favorable” for financing governments, households and businesses and described the recent spike in inflation as a “bump” that would decline in 2022.
The sad reality is that the EU, unlike the UK and US, suffers from financial fragmentation, with 27 different economies facing diverse challenges. This fundamental weakness will persist as long as the EU continues to have a monetary union without a fiscal union or a fully unified banking system.
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