Inflation: Getting big, but don’t panic yet – we are not living in the ’70s
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Oh snap. They was wrong: US inflation kicked ahead again in April.
The stateside measurement of the cost for goods and services is up 8.3% from a year ago, flummoxing economist forecasts of an 8.1% rise and enough to take the gloss of the US economic recovery.
The steamy CPI eased a wee bit from last month’s peak but it’s still mucking about near its highest levels since E.T.: The Extra Terrestrial stormed the box office in the summer of 1982.
T. Rowe Price chief international economist, Nikolaj Schmidt, says don’t lose your head just yet.
“The current inflation surge rests on a few moving pieces but is mostly cyclical — and central banks have both the ability and willingness to address the problem at hand.
“Contrary to some reports, we are not on the cusp of a return to the 1970s inflation inferno,” Schmidt says.
Schmidt says it’s time to step back, take a look at these rising prices through the lens of time. To understand the post-COVID surge in inflation, we need to understand the post-GFC period of lowflation that came before it.
“The post-GFC world was a world of deficient demand and idle resources — a very noninflationary world.”
“The universally accepted explanation for the tepid post-GFC recovery is secular stagnation, but, in my view, the true cause was deleveraging.”
In 2008, as the US financial system danced into the abyss, the US financial had an all-too-late epiphany: We got way too much debt, man.
Schmidt says the existential crisis drove debt repayments, and, through the taper tantrum, most emerging markets were also roped into deleveraging.
“In 2019, I argued that the deleveraging process in the developed world had run its course and that we were about to enter a period of structurally stronger demand. I still believe this is the right paradigm and that it provides the structural underpinnings of a more inflationary world,” Schmidt says.
“This doesn’t mean we are entering a world of runaway inflation, it just means the interest rate that keeps supply exactly in line with demand has risen.”
Then – the simple fact is – the global fiscal and monetary policy response to COVID was just too large for the global economy to absorb.
“The fact that we’ve now run out of labor tells its own story. Fortunately, cyclical demand management is another thing that central banks are well equipped for: tighten monetary policy and demand falls.”
The supply-side issues, Schmidt admits, “can’t be resolved by clever monetary policies.”
Like the semiconductors and the war in Ukraine, these choke points inspire surging vehicle and commodity prices.
These issues are but temporary, according to T. Rowe Price, and supply chains will eventually get their mojo back.
Unlike the ’70s they actually have the tools to control the above causes of inflation (save for supply-side).
“Inflation is a social choice, and by choosing independent central banks with clear inflation objectives and accountability, we have made the choice to keep inflation controlled.”
Then President Donald Trump tried in 2018 – threatening to fire Chairman Jerome Powell if he pulled the trigger on unwelcome tightening of monetary policy.
The result? Powell kept his job, interest rates went up, and the Fed remained independent.
Inflation has taken a starring role as the Number 1 threat to the heroic US post-pandemic economic recovery – the biggest single-year growth level in the States since the Ghostbusters first crossed the streams.
The spiralling costs that first infected the petrol pump and at 7-Eleven have gone all pandemic-like and spread beyond into housing, auto sales and most every corner of America’s economy.
Federal Reserve officials have responded to the problem with two interest rate hikes so far this year and pledges of more until inflation comes down to the central bank’s 2% goal.
Butski – and it’s a big butski – Wednesday’s data shows that the Fed has a painful task ahead.
“To bring inflation under control, central banks must tighten monetary policy to the point where growth slows to potential and, given our initial conditions, probably somewhat below potential,” Schmidt reckons. “When growth slows sharply, particularly when it is accompanied by rising interest rates, financial market volatility usually ensues.
“There’s no getting around this, I’m afraid.
“It’s the cost we incur to avoid the inflation infernos of the past, and, over the long term, it’s frankly a small price to pay.”