Why do central bankers no longer agree on how to regulate inflation?

Central bankers once knew what they needed to do to control inflation. As they grappled with the economic consequences of the coronavirus epidemic, an agreement on how best to stimulate low, stable price growth failed.

After years of setting interest rates based on inflation forecasts and striving to reach the 2% target, the world’s leading monetary authorities have been pursuing various strategies.

TC EC K. warned this week “Any vigilance is needed,” but any attempt to raise interest rates must “depend on the state, be guided by a steady improvement in the labor market, signs of stable inflationary pressures, and a change in fiscal policy” – so vague that each major central bank can say its policy meets the criteria.

The US Federal Reserve has changed his position to give more freedom to inflation և higher priority to employment: The European Central Bank is constantly interfering in the question of whether it will be more tolerant of any increase in inflation, և Japan Aponia Bank is struggling in vain to revive expectations of rising consumer prices.

Inflation. A new era?

In many large economies, prices are rising. FT is investigating whether inflation has finally returned.

DAY 1. Progressive economies have not faced rapidly rising inflation for decades. Will that change?

DAY 2. The global consensus among central bankers on how best to stimulate low, stable inflation has split.

DAY 3. US Coal Mine for US Inflation. Used cars.

DAY 4. How can the virus disrupt official inflation statistics?

DAY 5. Why are rising prices in advanced economies a problem for developing debt countries?

The change of the USA was the most radical in the strategy. Last year, Fed Chairman Ay Powell announced a new monetary field.

The Fed is seeking to move away from decades of rising interest rates to stave off potential inflationary pressures, while pursuing full-time employment, a strategy it says will help more Americans, including low-wage workers and minority groups.

This will allow inflation to exceed its 2% target for some time after a long-term earthquake, trying to reassure companies that they will keep interest rates low for a long time, thus spending rather than saving. One of the Fed’s motivations is to avoid repeating its position after the financial crisis, when tightening policies slowed the recovery.

“I’m aware of the risks on both sides of this road ahead.” said Lael BrainardGovernor Fed on Tuesday. “He would ‘watch out’ for inflation data to make sure it did not develop into ‘undesirable forms’, but he would ‘be wary of the risks of a pullback too soon,'” he said, warning of “prehistoric trends in low equilibrium interest rates.” [and] “Inflation of the underlying trend” would most likely “recover” for them.

But critics worry that the Fed’s strategy was developed not in an epidemic era but in a world of cautious fiscal policy. mass loans և expensesthat it could leave it behind in the curve if price pressures are created.

3.1% annual growth on Friday basic consumption expenditures The index reinforced some of those fears.

For the past five years, the BoJ has been pursuing an obligation to overestimate inflation, but has not even reached its 2% target. Surprisingly little has changed since the epidemic. Inflation is nowhere to be found on the horizon և spending growth is slow.

Japan Aponia households and companies are confident that inflation will remain close to zero, making it impossible for the BoJ to meet its target.

“Inflation expectations in Japan are deeply influenced not only by the rate of inflation observed over time, but also by past experience and norms developed in the process,” said BoJ Governor Haruhiko Kuroda in a recent speech.

Meanwhile, eurozone policy makers are involved Fierce argument as the ECB implements its policy review. The results will be announced in September.

Annual Inflation Rate Chart (%) showing Central Banks Facing Price Pressures

Olli Rehn, who serves on the board as Governor of the Central Bank of Finland, recently said: “From the point of view of economic and social welfare, it makes sense to accept a certain period [inflation] over-execution, at the same time taking into account the history of shooting. “

But ECB Executive Director Isabelle Schnabel warned that it would be risky. Last month, Schnabel said, though, that the central bank should not overreact if inflation exceeds After the slowdown, he is “skeptical” about formally targeting average inflation over a period of time.

“What should be the period during which the average is calculated?” How much of that should be reported? ” he asked. “I personally do not think we should pursue such a strategy.”

For some economists, these differences are possible. Monetary policy has expanded so much that central bankers are being given fewer tools to do more.

Richard Barwell, head of macroeconomic research at BNP Paribas Asset Management, said the ECB was almost “out of arms”, with inflation in the eurozone rising close to its target in May but below 2%. to do in a stable period.

“As long as there is no mass Biden-style fiscal stimulus on the road in Europe, or the disinfecting winds suddenly disperse, the monetary stimulus needed to get inflation above 2%. “, much more than they can do,” he said.

The line chart of interest rates (%) of the Central Bank policy, which shows that interest rates in advanced countries have dropped to zero.

That leaves the Fed with a difficult choice to make in the coming months. US inflation is: exceeding its target, the demand is so large, և it must decide whether to apply the brakes gently.

Policymakers are ready to debate for some support, but they have not shown any hesitation in their new policy, arguing that the recent rise in inflation is likely to be transient and unsustainable.

Last week, Fed Vice President Randal Quarles said the framework was designed for the current world: “slow labor growth, low potential, low underlying inflation, and consequently low interest rates.”

“I’m not worried about going back to the 1970s,” he said.

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