Central banks must not jump the gun on inflation

capx.co
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Inflation fears have been mounting. The UK annual rate hit 4.2% in October, the highest in a decade, and it's a similar story in numerous other countries. This has been causing a lot of debate among central bankers about the best course of action. Some say this burst of inflation is transitory and will pass without any need for any […]
Share Inflation is like body temperature – it is not a cause but a symptom of underlying potential problems

Inflation is like body temperature – it is not a cause but a symptom of underlying potential problems If stimulus was the sole cause, inflation would have been through the roof following the financial crash

If stimulus was the sole cause, inflation would have been through the roof following the financial crash Raising interests rates would choke off growth that's already set to be slow in 2022

Inflation fears have been mounting. The UK annual rate hit 4.2% in October, the highest in a decade, and it's a similar story in numerous other countries.

This has been causing a lot of debate among central bankers about the best course of action. Some say this burst of inflation is transitory and will pass without any need for any intervention. Others worry that it is the start of a longer period of runaway prices, and argue that we should be raising interest rates and cutting back on "money printing" – also referred to as quantitative easing (QE), which most major economies including the UK have been doing in recent years.

So far, the US Federal Reserve has started tapering its monthly QE at a fairly leisurely rate and there has been talk of rate rises on both sides of the Atlantic, but generally central banks have abstained from getting hawkish so far. But as the inflation numbers have risen and the pressure has increased, there is good reason to fear that they will put their reputations first and succumb. As far as I'm concerned, it would be exactly the wrong move.

The case for the doves

Inflation is like body temperature – it is not a cause but a symptom of underlying potential problems. So before prescribing any policy remedies, you first need to make the correct clinical assessment of what has caused this situation. The recent increase in inflation is not merely due to the central banks stimulating economies with QE and ultra-low interest rates. Had that…
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