Why don’t central banks agree on how to handle inflation?

Once, central banks knew what they needed to do to deal with inflation. When they are facing the economic consequences of the coronavirus pandemic, the consensus to know how to target low and stable price growth has been broken.

After years of trying to set interest rates and achieve a target of around 2 per cent according to inflation forecasts, major monetary authorities around the world are pursuing different strategies.

ELGA warned this week that “surveillance is necessary,” but any attempt to raise interest rates “should be dependent on the state and continuous improvements in labor markets, signs of persistent inflationary pressures and changes in fiscal policy stances” – so vague can all major central banks say its policies meet criteria that he has.

If the US Federal Reserve has it he changed his attitude To give inflation more opportunities and give priority to employment, the European Central Bank is constantly immersed in whether or not it has a greater tolerance for inflation overruns, and the Bank of Japan is in vain to revive expectations of rising consumer prices.

The change in US strategy has been the most radical; last year Faith President Jay Powell announced a new monetary framework.

The Fed’s belief is that it wants to move away from decades of rising interest rates to avoid potential inflationary pressures, while harder jobs get fuller employment, a strategy that will benefit more Americans, including low-wage workers and minority groups.

Inflation will allow us to exceed the 2 percent target after falling for a long time below, so that companies and firms can continue to keep interest rates low for a long time and therefore try to spend instead of saving. One of the Fed’s motivations is to avoid repeating its stance after the financial crisis, when the tightening of policies slowed the recovery.

“I am aware of the dangers on both sides of this expected path,” said Lael Brainard, Governor of the Faith, Tuesday. He said he would “carefully monitor” inflation data to ensure it doesn’t develop “in an inappropriate way,” but also said he will “be vigilant about the risks of backtracking too early,” warning of previous pandemic trends of “low equilibrium interest rates”. [and] they would “confirm” themselves that low-prone inflation is “on its own”.

Critics worry the Fed’s strategy was designed for a world of prudent fiscal policy, not a pandemic era indebtedness and massive spending, which can leave the curve behind if price pressures arise.

Friday’s 3.1% year-on-year increase basic personal consumption expenditure the index reinforced some of these fears.

I’m not worried about the return of the 1970s

The BoJ has been committed to overcoming inflation for the past five years, but has not even reached its 2 percent target. Little has changed since the pandemic: inflation is nowhere to be found on the horizon and growth in spending is slow.

Japanese households and businesses are confident that inflation will remain close to zero, making it impossible for the BoJ to achieve its goal.

“The formation of inflation expectations in Japan affects not only the inflation rate observed at the time but also past experiences and the rules developed in the process,” BoJ Governor Haruhiko Kuroda said in a recent speech.

Meanwhile, eurozone officials a an angry argument As the ECB reviews its policy; the results will be announced in September.

Olli Rehn, sitting on the council as head of the Finnish central bank, recently said: “It makes sense to accept a certain term from the point of view of economic and social welfare. [inflation] excessive shot, considering the history of the minimum shot. “

But ECB Executive Director Isabel Schnabel warned it would be dangerous. Schnabel said last month that the central bank should not react too much if inflation exceeds after the sluggishness, it is “skeptical” that the average inflation will be formally targeted for a certain period of time.

“How long should the average calculation period be? How much of that should be communicated? he asked. “I personally don’t think we should follow such a strategy.”

Some economists argue that these disagreements are being sidelined: monetary policy is so widespread that central banks lack the effective tools to do more.

Richard Barwell, head of macro research at BNP Paribas Asset Management, said the ECB was virtually “without ammunition” and that inflation in the eurozone in May was close to 2 per cent but above the target of less than 2 per cent, would take ambitious fiscal policy or simply lucky to do it for a lasting period.

“Unless massive Biden-style fiscal stimulus or deflationary wind gusts coming down the road in Europe are suddenly wasted, inflation is the number of monetary stimuli needed to get above 2 percent… Beyond what they can do,” he said.

This will give the Fed a difficult chance in the coming months. It’s US inflation exceeding its purpose, the demand is intense and he has to decide whether to put the brakes on slowly.

Politicians are ready to open a debate, but have shown no sign of moving away from their new policy framework, stressing that the recent rise in inflation could be temporary and not sustainable.

Last week Faith Vice President Randal Quarles said the framework was designed for today’s world, with “slow staff growth, lower growth potential, lower underlying inflation and therefore lower interest rates”.

“I’m not worried about the return of the 1970s,” he said.