As price increases accelerate, authorities at major central banks are slowly beginning to move away from the narrative of the “transitory” inflation that has already cost them the policy initiative. But the necessary pivot is far from complete and not fast enough, particularly at the US Federal Reserve.
CAMBRIDGE – Today inflation is on the front pages of newspapers around the world, and with good reason. The prices of more and more goods and services are rising in a way not seen in decades. This inflationary peak, together with the shortage of supply, be it real or feared, is generating anxiety in consumers and producers.
And not only that. It is also becoming a hot political issue, as it threatens to exacerbate inequality among people in many countries and derail the much-needed sustainable and inclusive economic recovery after the Covid-19 pandemic.
For their part, the central bank authorities of the United Kingdom and the United States have begun to move away from the narrative of a “transitory” inflation. (The cognitive transition of the European Central Bank is less pronounced, which makes sense given that the inflationary dynamics there is less drastic), but it is far from reaching its peak, and even less with the desired speed, particularly in the Reserve US Federal, the world’s most powerful and systemically important monetary institution.
The delays by the United States Congress in passing measures to increase productivity and improve labor force participation in that country are not helpful either.
The reasons for today’s rising inflation are well known. Buoyant demand is finding inadequate supply, a result of global disruptions in transportation and supply chains, worker shortages and energy constraints.
While notable, these price hikes do not herald a return to the double-digit inflation rates of the 1970s. Rigid pricing is rather rare these days. The initial conditions around the formation of inflationary expectations are much less volatile. And the credibility of central banks is far greater, although today it is facing its most severe test in decades.
Still, inflation will be much more pronounced than Fed officials thought when – especially in the early stages of the coronavirus crisis – they again and again dismissed mounting price pressures as a transitory phenomenon. Even today their inflation estimates underestimate what lies ahead, despite having been revised upwards several times already.
Inflationary expectations based on surveys compiled by the New York Federal Reserve have risen more than 4% over the one- and three-year time horizon. The collateral effects of inflation trends on costs are widening. Churn rates among American workers are at all-time highs as employees feel more comfortable quitting their jobs to seek higher-paying jobs or a better work-life balance. There is more talk of labor strikes. And all of this is exacerbated by consumers and businesses, who represent future demand, primarily in response to concerns about product shortages and rising prices.
The current inflationary outbreak is part of a general structural shift in the global macroeconomic paradigm. We have gone from a situation of poor aggregate demand to one in which demand is generally good. Notably, retail sales in the United States increased 13.9% year-on-year in September, higher than expected, which indicates that there are still many spending spaces available for purchasing power to translate into effective demand.
Of course, this is not to say that there are no demand composition issues that need to be addressed. Inequality remains an urgent concern, not only of income and wealth but also of opportunity.
Higher and persistent inflation underscores those concerns, as its implications are multifaceted: economic, financial, institutional, political, and social. Its effects will be less and less uniform and will hit the poor particularly hard.
In global terms, the consequences of rising inflation represent a threat that could impact some low-income developing countries, taking them off a secular path of economic convergence.
All of this makes it even more important that the Fed and Congress act swiftly to ensure that the current inflationary phase does not unnecessarily end up undermining economic growth, increasing inequality, and fueling financial instability. A marked reduction in monetary stimulus is needed, which is still operating in extreme emergency mode, despite the unfortunate deadlines governing the new Fed policy framework.
And US lawmakers can help by energizing initiatives that improve the supply of both capital and labor that are fully within their reach, that is, by passing measures to modernize infrastructure, boost productivity, and increase participation. of the workforce.
The authorities should also strengthen prudential regulation and supervision of the financial sector, especially the non-banking system. And, given the increased pressures on corporate profit margins and the superior ability of large companies to navigate through supply disruptions, they will have to be very vigilant about firm concentration.
It is good news that, after initially misinterpreting the dynamics of US inflation, today there are more Fed officials who are getting a better understanding of the situation. The US Federal Reserve itself would do well to catch up faster. Otherwise, you will end up in the middle of a culprit hunt that would only erode public credibility and undermine your political reputation.
The author
Mohamed A. El-Erian, President of Queens College, University of Cambridge, was President of the Global Development Council of US President Barack Obama. He was named one of Foreign Policy’s Top 100 Global Thinkers for four consecutive years. He is the author of two New York Times bestsellers, including the most recent The Only Game in Town: Central Banks, Inebility, and Avoiding the Next Collapse.
Copyright: Project Syndicate, 2020
Reference-www.eleconomista.com.mx