A tactical repositioning on the subject of inflation is underway among Western central bankers. The arguments circulating in the corridors of the Eccles Building in Washington and in Frankfurt suggest that it is most likely not just a transitory phenomenon linked to the rebound in world demand. «The alarm bell rang last June. The Fed was expecting a slowdown in the inflationary thrust that didn't happen, indeed the numbers show signs of persistence. The inflationary upsurge was thought to be related to a reaction after the 2020 deflation. Joseph Moscarini is a professor of economics at Yale, co-director of the Cowles Foundation-supported macroeconomics research programs, and co-chair of the research group on labor markets at the National Bureau of Economic Research.
Professor, Jerome Powell argues that "the problems are proving to be stronger and more lasting than anticipated". What do you think?
«Inflation is a complex phenomenon, influenced in a decisive way by the expectations of households and businesses. The Fed has tried in the last ten years, albeit with little success, to raise inflation, the same has been done by the ECB. In Japan, they've even been trying since the XNUMXs. The point is this: so far expectations have been low and deflationary forces have prevailed, such as population aging and growth in global savings.
Until a few weeks ago, however, central bankers didn't seem to care too much about it.
“We are living in an unprecedented time for central banks. We see very clear sectoral shocks, similar to what happened with the oil shock in the 6s. In the USA there are certainly some factors to monitor: the increase in the cost of wages in the last XNUMX months, the demand for goods which has had an enormous rebound, the difficulty in finding labor in many sectors, such as catering or tourism and manufacturing . In the face of all this, the expectations of workers and businesses on inflation have changed».
Another concern is added: the fear that monetary policy, as verified in this decade, no longer has the magic wand.
«Quantitative Easing in Europe and in the USA has actually been very effective in the last two major crises. However, the prolonged zero rates have led us to what is called the "liquidity trap". The world today is flooded with liquidity: what will happen to inflation if Europeans and Americans start pouring it heavily into consumption?».
A trap inside the inflationary spiral?
«Central banks in this perspective could announce a violent monetary tightening, as Paul Volcker did in 1979. But the monetary authorities hold their power according to their credibility. If they announce then they have to carry out the announcements. This is why I believe that we will be dealing with "softer" paths to raise rates».
This inflationary season will also be influenced by the ecological transition, by energy conversion policies, by the increasingly complex supply of raw materials. Do central bankers have the tools to govern it so as not to create too many problems for the recovery of the economy?
“In general, energy is not a theme for central bankers. Only if the price of energy were to rise continuously would it become a problem for inflation. Right now it seems to me more of a question of price volatility. The central bankers have the dogma of the desired inflation at 2%, but we can also think of living with an inflation of 2.5-3%».
So is the "bottleneck" created in the restart of production, in relation to inflation, a temporary phenomenon?
“We will see the new global demand structure at the end of 2022, when the public health problems related to the pandemic will be resolved. It could also be changed permanently: less travel, less mass tourism, more video conferences and less physical contact. The effects on the labor market are still to be evaluated. After the financial crisis of 2008, which upset entire employment sectors such as construction or finance, the labor market fully normalized only after 6-7 years".
Are significant wage increases therefore likely in the US and in Europe?
«A wage tension is visible for now, especially in the USA, in some sectors. In the last two quarters, however, we have seen a considerable increase in the speed of movement of employees between different jobs. This means that some workers find new jobs at more favorable conditions, without for now touching the "reserve" of the unemployed. If the new jobs are more productive, this transitory dynamic of labor reallocation helps to mitigate the wage trend, effectively calming labor inflation. If inflation does not abate quickly within this year, in 2022 when this reallocation is destined to wear off, nominal wage increases could be even more substantial.
Do you believe in the predictive power that many social networks can have in analyzing economic trends?
“Getting real-time data is very useful. I suspect that central banks already do it: I'm thinking of Google searches or the price data collected on Amazon, rather than from social networks. However, I highly doubt that the big social network companies want to share their data with someone else.
