Global | Inflation: an uncertain reality

Summary

The ECB and most central banks in developed economies have taken up the baton by setting an inflation target of 2%. This is an unenviable task: the only genuinely and uncontested effective tool at their disposal is interest rate control, which loses effectiveness the further inflation is from the set target.

Key points

• Key points:
• Today we find ourselves amid several events with unpredictable outcomes, starting with the invasion of Ukraine - a conflict that has already led to a spike in energy prices and dampened activity in major European production centers.
• But the invasion of Ukraine is not the only inflationary AND contractionary pressure with a very uncertain duration. We are still dragging two such cross-fires (inflation/contraction) in the wake of the COVID epidemic: bottlenecks in global production chains and the "Great Resignation" in the labor force.
• Added to those is the cooling of relations between the US and China, which weakens the globalization process of recent decades. While climate change is already a reality that is pushing up agricultural prices.
• If those inflationary/contractionary pressures are deemed to be temporary, the ECB would do good in tolerating some increase in the price level in order not to amplify the economic damage though very high rates — not so much for humanitarian reasons, but to avoid the risk of "Japanization" once such pressures are relieved.
• But if the pressures are considered permanent, the conventional prescription is to correct inflation as soon as possible, since delaying the measure will only make it all the worse.

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