Low world inflation dogs bankers, even as economies grow
JACKSON HOLE (WYOMING): The world’s top central bankers gather in Jackson Hole, their confidence bolstered by a sustained return to economic growth that may eventually allow the European Central Bank (ECB) and the Bank of Japan to follow the Federal Reserve in winding down their crisis-era policies.
Yet in one key area, none of the world’s central banks has found the answer.
Two per cent target
Inflation remains well below their two per cent targets, stoking a debate about whether they are missing signals of a less than healthy economy and the need for a slower path of “rate normalisation”, or that they simply don’t understand how inflation works in a globalised world. In Japan, offi- cials have researched behavioural causes, wondering whether businesses and families are just slower to react to economic signals than thought. European officials have blamed slow-moving union wage contracts and online shopping, while US policymakers have cited a lengthy sequence of “one-offs” in pricing from oil to cellphones to prescription drugs.
In each case the response of policymakers has been the same: wait it out and talk confidently about inflation’s return, as the Fed has put it since 2013, over “the medium term”.
Within the Fed, policymakers are debating the causes of low inflation. “Inflation is a little bit below target and it’s kind of a mystery,” Fed Governor Jerome Powell said on Friday in Jackson Hole, adding that the Fed could be “patient” about raising rates.
Cleveland Fed President Loretta Mester said she was convinced the problem is not a weakening economy. She pointed to changes in how businesses set prices — a supply side issue she says leaves her comfortable pressing ahead with slow but steady interest rate increases.
Concerns over a recent slide in inflation have renewed questions about whether a global tightening of monetary policy can proceed, with US investors betting the Fed will have to hold off on more rate changes until later next year.Bank of Japan consultants have puzzled over whether people shop and save as if they fully see the future, or whether they look at the past and only slowly adapt to change. If the latter, then what central banks say is less important.