Spectre of inflation plays on minds of central banks as they cut stimulus
Policy makers caught in a bind amid stagflation fears
Many central banks are starting to withdraw the emergency stimulus they introduced to fend off last year’s pandemic recession.
With inflation accelerating, the Federal Reserve is set to slow its asset-purchase programme, while peers in Norway, Brazil, Mexico, South Korea and New Zealand are among those to have already raised interest rates.
Behind the shift are signs that the recent inflation scare won’t fade soon amid supply chain strains, surging commodity prices, post-lockdown demand, ongoing stimulus and labour shortages. Complicating the task for policy makers is that growth may be slowing, prompting some to warn of a stagflationary-like environment.
Mismatched priorities
That puts central bankers in a bind as they debate which risk they should prioritize. Targeting inflation with tighter monetary policy adds to pressure on economies, but trying to boost demand may ignite prices further.
Huw Pill, the Bank of England’s new chief economist, said last week, the “balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated.”
Not all are as concerned or looking to change tack. Officials at the European Central Bank and Bank of Japan are among those intending to keep stimulating their economies aggressively. And the International Monetary Fund predicts that in advanced economies at least, inflation will soon ease to about 2 per cent.
“Stagflation is too strong a word. Still, supply shocks that lift prices and lower output leave monetary policy makers with no easy options. With little urgency to act, the Fed and other major central banks are preserving optionality,” said Tom Orlik, chief economist at Bloomberg Economics.