Inflation is global, but its traps are local

Por Daniel Moss

When it comes to accelerating inflation around the world, don’t expect a quick response from the two biggest economies. The United States and China are trapped by their own political decisions and national priorities. Neither of you is keen to deal with price increases. Germany’s calls for drastic action come too late.

For anyone still married to the idea that high inflation is a short-term phenomenon and that it is just a respite from years of too-low readings, the latest figures are sobering. China’s producer prices posted the largest increase in 26 years and consumer inflation also rebounded, Beijing reported on Wednesday.

Hours later, the US Department of Labor noted that consumer prices rose at the fastest pace since 1990, exceeding the expectations of economists. Germany’s council of economic advisers demanded that the European Central Bank explain how it will approach monetary policy. Inflation in this essential European nation will be above the ECB’s target this year and next, the group projected.

Most central banks know how to deal with this, right? They just raise interest rates. Even critics of long easy money say that when it comes down to it, the monetary authorities have a proven and effective formula. Central banks dare not have truly runaway levels of inflation and risk going back to the bad days of the 1970s, at least in the United States and Europe.

Or, in the case of China, wasting a large part of the prosperity and economic stability generated by the opening of the economy devised by Deng Xiaoping. Despite all the talk about the cold war between Washington and Beijing, the inflationary experience of China it has largely followed that of the West, according to a Reserve Bank of Australia document released on the eve of the pandemic.

However, the current unrest does not come out of nowhere. China is concerned about growth, which is already slower than the fourth quarter of 2019, before covid-19 spread globally. What started in 2021 as an unprecedented recovery risks fading.

Bank of America Corp. recently lowered its estimate of the expansion of China for next year, from 5.3% to 4%. The country is likely to relax policy despite rising inflation, rather than responding to it. Further cuts in reserve requirements are expected for lenders. Prime Minister Li Keqiang warned of downward pressure on the economy.

For its part, the Federal Reserve will find it difficult to accelerate the adjustment. Chairman Jerome Powell has emphasized that quantitative easing must be terminated before considering increases in the benchmark rate. The phase-out of quantitative easing has just been announced and its completion is scheduled for mid-2022. That makes a significant withdrawal of the stimulus unlikely before the third quarter.

Sure, the Fed It can always accelerate the stimulus reduction process, but the institution has done everything possible to avoid a crisis like the one observed in the market in 2013. The Fed is likely to fear that if it accelerates it, investors will enter into panic at the possibility that rate hikes are coming or that it is due to a greater inflationary problem than has been said. This is also an unfortunate time for questions to linger about who will run the Fed for the next four years.

It is unlikely that the president of the ECB, Christine Lagarde, find the German demand useful. Since the inception of the euro, the heads of the ECB have become used to German officials warning of the sins of easy money. In its early days, the ECB was strongly influenced by this view: the bank was located in Frankfurt and its first chief economist, Otmar Issing, was a student of the legendarily tight-fisted Bundesbank.

But views on tough monetary policy have lost ground over the years and a more expansionary trend now reigns in the eurozone. Germany lost the battle, but is still averse to higher prices and is no less inclined to be loud about it. The ECB should be concerned, at some level, with an erosion of political support in Europe’s economic powerhouse.

A China he would like there to be an adjustment in Western central banks arguing that quantitative easing and ultra-flexible environments do more harm than good. But the Bundesbank-style rhetoric does not suit the People’s Bank of China and needs to be revised. If China’s central bank were truly an enemy of inflation, it would be tightening its monetary policy, not contemplating easing.

The money nostalgia market is on the rise. Inflation is globalized, but don’t look for a global response in the style of “Plaza Accord”To echo the 1985 pact signed at a luxurious New York hotel that realigned the trajectories of major currencies. Internal conditions are not favorable enough.