Low inflation cannot be taken for granted

In the ten years after the 2008 financial crisis, some central bank governors expected each quarter Inflation will recover soon. After endless frustration, they will predict again that it will appear again-this time slightly down.

It is this kind of despicable experience that makes people worry about the current market’s return on price increases. Seeing that the prediction of a return to “normal” inflation will not help, and the warning that the quantitative easing policy will lead to hyperinflation if misplaced, it is now even more difficult to believe that inflation will quickly resume after the pandemic. , Which further intensified economic activity.

However, history is full of “institutional changes” in which economic behavior undergoes lasting changes. This includes the low growth and low inflation after the 2008 crisis, or what Mervyn King, the former Governor of the Bank of England, called the “NICE period” before that, that is, ten years of non-inflationary continuous expansion. Many of these changes occurred after the economic downturn, after which the certainty of the previous regime seems to no longer hold. Few people could foresee this before the facts happened.

market Worried about inflation So it is understandable. In anticipation that the central bank will be forced to raise interest rates, the value of stocks and other long-term assets fell this week.This Latest U.S. inflation dataThe report was released on Wednesday, stating that the highest annual price growth rate since 2008 only reinforces this impression-although the comparison with the price drop during the lock-in period has distorted its figures.

It may be wise for a prudent investor to protect their portfolio from inflation, but Central banker Facing an unclear road.Is the cost pressure unobvious temporary Or part of a more permanent transformation. In the final analysis, no matter what happens during the economic recovery, the central bank must fix inflation on its target and closely monitor expected changes.

The pandemic is an unusual recession. It was not caused by the over-expansion of the financial system or changes in monetary policy, but a deliberate decision to close some economies. Just like an extraordinary response, not only on the scale of the stimulus (both the central bank and the Ministry of Finance have opened all stops), but it also includes its design to hand over funds to companies to keep workers employed. .This may result in Faster recovery, And quickly use up the excess capacity.

The capacity may have been reduced. Not all businesses and jobs are supported by the government, and it will take time to rebuild them. Therefore, any transition to green and other new ways of working will also be; friction may lead to higher price pressures.

The key is Labor market behavior. A clear goal of US government policy is to transfer power to workers. This may result in temporary price increases being incorporated into salary transactions and eventually into long-term inflation expectations. No need to overreact. Any change in the balance of power is small, and may even be overdue: this is unlikely to lead to a rapid rise in inflation.

The experience of recovery from the 2008 financial crisis tells central banks that low inflation is consistent with a much lower unemployment rate. People are also aware that their ability to predict changes in the relationship between unemployment and inflation is limited. As the world recovers from the coronavirus pandemic, they should remember these two lessons.

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