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Prices can be disposed of, and central banks are helpless

Supply problems in the global economy have accelerated inflation at such a pace that central banks are being forced to respond despite the fact that they are unable to glue together or untie fragmented supply chains, he writes. Bloomberg. The basic problem seems almost unsolvable: they will have to separate the extent to which this phenomenon is responsible for higher prices, and the fact that isolated consumers will increase their purchases as the holidays approach.

If central banks raise their core rates, it will dampen the demand that pulled economies out of the 2020 recession, while doing little to solve logistical problems because central banks are unable to replenish warehouses. Therefore, if the latter problem is mitigated, higher interest rates could amplify the slowdown in economies. However, if monetary easing is eased and supply problems slowly ease, higher prices may be incorporated into inflation expectations, wages may rise, and central banks may eventually have to squeeze the brakes by a few feet.

Most central banks can admit behind the scenes that inflation is much higher than expected. However, some executives are sure to chew their nails in their nervousness, says Stephen King, chief economic adviser at HSBC Holdings. Meanwhile, consumer prices have risen four percent in the past 12 months, and core inflation, adjusted for volatile food and energy prices, is at its highest level in a decade, analysts at JPMorgan Chase wrote.

different answers

In the UK, inflation is on track to accelerate to double the Bank of England’s target. Bank of England President Andrew Bailey has spoken these days of the inevitable need to intervene, with experts predicting the Bank of England’s key rate will rise by 0.5 per cent by the end of the year. In doing so, they can follow the example of Norway and New Zealand.

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The US Federal Reserve does not plan to join this group, but is preparing to start reversing the monetary easing policy, which buys $120 billion per month in assets, starting in November. Analysts expect a rate hike only in the second half of next year at the latest, as the Fed is currently insisting that inflation is caused by temporary factors (temporary disruption to supply chains).

The European Central Bank appears to want to continue to support the economic recovery, in part because it wants to refute expectations that it will overreact to inflation risks, in line with its past practices. Christine Lagarde, president of the bank, said these days we are facing a rise in inflation that, as it came, is declining at the same speed.

predictions

Shared in the thinking is Beijing’s central bank governor Ji Kang, who has said that for a quarter-century China’s producer prices have not increased in a year until they are finally tamed. According to IMF experts, inflationary pressures in developed countries will fade next year. Neil Dutta, director of macroeconomics at Renaissance Macro Research, warns that a combination of strong demand-shattering deliveries could cause central banks to change direction unexpectedly at some point in the coming months.

The solution may be for central bank executives to stay out of the way, and expect economic agents to be willing to step in seriously to curb inflation. This could dampen inflation expectations, says Josen Briggs, strategist at Natwest Markets. In other words, they can buy time until it becomes clear how persistent logistical hassles and energy costs are.