Many central banks are beginning to reduce the emergency stimulus that they implemented to avert last year’s pandemic recession.
With inflation on the rise, the Federal Reserve is planning to scale back its asset-purchase program, while peers in Norway, Brazil, Mexico, South Korea, and New Zealand have already raised interest rates.
Behind the move are indications that the recent inflation concern will not go away anytime soon, owing to supply chain difficulties, increasing commodity prices, post-lockdown demand, ongoing stimulus, and labor shortages.
The fact that growth may be slowing complicates policymakers’ role, prompting others to warn of a stagflationary-lite scenario.
This puts central bankers in a predicament as they consider which risks to emphasize. Targeting inflation with tighter monetary policy adds to the pressure on economies, while attempting to promote demand may cause prices to rise even faster.
For the time being, many people believe that inflation has persisted longer than most projected. According to Huw Pill, the Bank of England’s new chief economist, the “balance of risks is currently turning towards substantial concerns about the inflation outlook, given the current strength of inflation appears to be more long-lasting than originally anticipated.”
Not everyone is as anxious or eager to change course. Officials at the European Central Bank and the Bank of Japan are among those who intend to continue aggressively supporting their economies. And the International Monetary Fund anticipates that inflation will shortly fall to around 2% in industrialized economies.
What Bloomberg Economics Says:
“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. If stubborn inflation forces their hand, the global recovery will face an additional drag.”
–Tom Orlik, chief economist