Time to stop trash-talking inflation. Forecasts for a decent pickup in the pace of price increases ought be welcomed, and we’re a long way from the bad old days of the 1970s.
While measures of US inflation gained at the end of last year, they are well below levels desired by the Federal Reserve. In China, consumer prices unexpectedly fell 0.3% in January from a year earlier.
Japanese officials sometimes sound like they have given up on their 2% goal. Even in Southeast Asia, where growth has historically been faster than the developed world, price movements are anemic. South Korea flirts with deflation; Malaysia and Thailand endure it.
Market gauges do show inflation coming back: 30-year Treasury yields topped 2% last week for the first time in a year; UK government bonds slid and oil rallied. The idea is that an economic recovery, assisted by massive fiscal and monetary stimulus, will lift consumer prices off the floor. Unfortunately, this is often described with fear-mongering language like “surge,” “breaking out,” “warning” and even “the end of largesse.” This skates past lessons from the decade preceding the Covid-19 pandemic. Far from being a harbinger of doom, a spurt in prices would count as policy triumph.
For years, we’ve been hearing that growth has been too slow, inflation too low and that central bankers have failed. Remember the hand-wringing several years ago when market interest rates dived below zero? Is the critique now that officials have done their jobs too well? Only when inflation settles comfortably around 2% should policy makers think about withdrawing stimulus.
In that sense, we are a long way from the end of monetary support. To infer otherwise is to ignore what decision-makers are actually saying. Fed Chair Jerome Powell expects and wants faster price increases. “It helps to look back at the inflation dynamics that the United States has had now for some decades and notice that there has been significant disinflationary pressure for some time, for a couple of decades. Inflation has averaged less than 2% for a quarter of a century,” Powell said at a Jan. 27 press conference. “Dynamics evolve constantly over time, but they don't change rapidly. So, we think it's very unlikely that anything we see now would result in troubling inflation.”
Paul Volcker, who died in December 2019 on the eve of the pandemic, would have laughed at the anxiety today. When he became Fed chair in 1979, consumer prices were increasing at about 15%. He pushed interest rates to 20% to wrestle that beast. Inflation just wasn’t the same again and has receded as a threat ever since. Volcker’s heirs keep looking for such dynamics to recur, but are always disappointed. Surely quantitative easing and big deficits after the 2007-2009 global financial crisis would correct that trend, the line went. It didn’t happen, and the Fed was chastened by the experience.
But the cash floating around the monetary system in the pandemic era is even larger, so the snapback will be stronger and concerns are more justified, the argument goes. I’m not convinced. The US underwent a significant fiscal expansion in 2017 when Congress passed Donald Trump's tax cuts, just as the economy was cruising. It was seen then as highly unusual that such a big shift would occur outside of a recession, as I’ve written. Growth picked up even more and the unemployment rate eventually fell to 3.5%, the lowest in half a century. Inflation was tranquil.
Things change, and as my Bloomberg Opinion colleague Ferdinando Giugliano has written, one cannot blithely dismiss these worries. Just as inflation was obstinately low in the 2010s, who is to say it won’t surprise on the way up? When the time does come to pull back, investors are right to anticipate pain, no matter how carefully it’s choreographed. Ben Bernanke learned this lesson the hard way: Just the suggestion of tapering in 2013 sent markets into a tailspin.
The good news for many central bankers is that if price increases truly become a problem — as opposed to making a healthy re-appearance — their successors will be the ones to clean it up. In the meantime, lets skip some of the gloom. There’s a lot of history to overcome before we really have bad inflation. I’ll be happy with the good kind.
Bloomberg
