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From the IMF Blog: Inflation Scares in an Uncharted Recovery

By Francesca Caselli and Prachi Mishra عربي, 中文, Español, Français, 日本語, Português, Русский A key question is what combination…

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This article was originally published by IMF Blog

By Francesca Caselli and Prachi Mishra

عربي中文, Español, Français, 日本語, Português, Русский

A key question is what combination of events could cause persistently faster price gains.

The economic recovery has fueled a rapid acceleration in inflation this year for advanced and emerging market economies, driven by firming demand, supply shortages, and rapidly rising commodity prices.

We forecast in our latest World Economic Outlook that higher inflation will likely continue in coming months before returning to pre-pandemic levels by mid-2022, though risks of an acceleration do remain.

Policymakers must walk a fine line between patient support for the recovery and being ready to act quickly.

The good news for policymakers is that long-term inflation expectations are well anchored, but economists still disagree about how enduring the upward pressure for prices will ultimately be.

Some have said government stimulus may push unemployment rates low enough to boost wages and overheat economies, possibly de-anchoring expectations and resulting in a self-fulfilling inflation spiral. Others estimate that pressures will ultimately be transitory as a one-time surge in spending fades.

Inflation dynamics and recovering demand

We examine if headline consumer price index inflation has moved in line with unemployment. Although the pandemic period poses many challenges to estimating this relationship, the unprecedented disturbance doesn’t seem to have substantially altered this relationship.

Advanced economies are likely to face moderate near-term inflation pressure, with the impact softening over time. Estimates of the relationship between slack, the amount of resources in an economy that aren’t being used, and inflation for emerging markets instead seem to be more sensitive to the inclusion of the pandemic period in the estimation sample.

Anchoring expectations

Inflation during the pandemic has been well anchored, according to measures of long-term expectations known as breakevens drawn from government bonds in 14 nations. These closely watched gauges have been stable so far during both the crisis and the recovery, though uncertainty about the outlook remains.

A key question is what combination of conditions could cause a persistent spike in inflation, including the possibility that expectations become unanchored and help spark a self-fulfilling upward spiral for prices.

Such episodes in the past have been associated with sharp exchange-rate depreciations in emerging markets and have often followed surging fiscal and current account deficits. Longer-term government spending commitments and external shocks could also contribute to expectations becoming de-anchored, especially in economies with central banks that aren’t believed to be able or willing to contain inflation.

Moreover, even when expectations are well anchored, a prolonged overshoot of the inflation target that policymakers have set could cause a de-anchoring of expectations.

Sectoral shocks

The pandemic has triggered large price movements in some sectors, notably food, transportation, clothing, and communications. Strikingly, the dispersion or variability in prices across sectors has so far remained relatively subdued by recent historical standards, especially compared with the global financial crisis. The reason is relatively smaller and shorter-lived swings in fuel, food, and housing prices post the pandemic, which are the three largest components of consumption baskets, on average.

 

Our forecast is that annual inflation in advanced economies will peak at 3.6 percent on average in the final months of this year before reverting in the first half of 2022 to 2 percent, in line with central bank targets. Emerging markets will see faster increases, reaching 6.8 percent on average then easing to 4 percent.

The projections, however, come with considerable uncertainty, and inflation may be elevated for longer. Contributing factors could include surging housing costs and prolonged supply shortages in advanced and developing economies, or food-price pressure and currency depreciations in emerging markets.

Food prices around the world jumped by about 40 percent during the pandemic, an especially acute challenge for low-income countries where such purchases make up a big share of consumer spending.

Simulations of several extreme risk scenarios show prices could rise significantly faster on continued supply chain disruptions, large commodity price swings, and a de-anchoring of expectations.

 

Policy implications

When expectations become de-anchored, inflation can quickly take off and be costly to rein back in. Ultimately, central bank policy credibility and price expectations are difficult to precisely define, and any assessment of anchoring can’t be decided entirely based on relationships in historical data.

Policymakers therefore must walk a fine line between remaining patient in their support for the recovery and being ready to act quickly. Even more importantly, they must establish sound monetary frameworks, including triggers for when they would reduce support for the economy to rein in unwelcome inflation.

These thresholds for action could include early signs of de-anchoring inflation expectations, including forward-looking surveys, unsustainable fiscal and current account balances, or sharp currency swings.

Case studies show that while strong policy action has often tamed inflation and expectations for it, sound and credible central bank communication also played an especially crucial role in anchoring views. Authorities must be alert to triggers for a perfect storm of price risks that could be individually benign but when combined may lead to significantly more rapid increases than predicted in the IMF’s forecasts.

Finally, a key feature of the outlook is that there are significant differences across different economies. Faster inflation in the United States, for example, is projected to help drive the acceleration for advanced economies, though pressures in the euro area and Japan are estimated to remain relatively weak.

 

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Economics

UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat

UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat

Authored by Bill Blain via MorningPorridge.com,

“T’was the best of times,…

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UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat

Authored by Bill Blain via MorningPorridge.com,

“T’was the best of times, t’was the worst of times …”

The risks of Plan B and a further Covid Lockdown are multiplying. It will clearly impact markets, but the real economic effects of Covid combined with energy costs, supply chains and bleak company earnings forecasts may be pushing us towards stagflation anyway.

“How to address the biggest economic shock in 300 years?” asked UK Chancellor Rishi Sunak while doing his pre-budget politicking last week. Whatever you believe or don’t believe about Covid, Sunak is quite right to consider it at the centre of the on-going economic crisis. Markets should factor that reality accordingly – which boils down to a very simple question: how much will Covid force Central Banks and Governments to act to stabilise the global economy?

This week pay attention to the UK Budget on Wednesday on how Chancellor Sunak addresses the ongoing critical-care needs of the UK by stepping away from his previous “policy-mistake” sounding mention of austerity spending cuts and tax-rises to make noises about increased “levelling out” spending. Hanging over everything will be the question – how much more economic pain could Covid inflict?

It’s a tough question.  A new lockdown would be economic suicide. The UK government plans to ride it out – but the history of the last 19 months says they won’t hesitate to make a U-Turn and institute Plan B if they think their credibility is on the line if the numbers of infections surge and the health service looks swamped. That’s a potential trade: should you sell UK stocks now on the likelihood the government will panic? (And buy-them back almost immediately as the Bank of England stops the noise about a rate cut and QE taper.)

But… another question is how much will rising infection numbers cause the economy to contract anyway? How much has confidence already been dented?

Here in Blighty, It’s a tale of two headlines:

Daily Mirror: Fears of new lockdown Christmas as scientists warn tougher Covid measures needed NOW.

Daily Telegraph: Coronavirus cases to slump this winter, say scientists.

The papers looks like it boils down to a political split – which may reflect the UK’s national pride in our venerable National Health Service. How much we are prepared to sacrifice to protect the sacred cow of the NHS has become a badge. The left-leaning, Labour supporting Daily Mirror is peddling one set of scientific views, while the daily journal of the Conservative Party, the Torygraph, finds another set of white-coats to quote.

What does the threat of Plan B or further lockdowns mean for the UK economy? A quick glance round the motorway service stations we stopped in yesterday shows many more people wearing masks, and I’ll be interested in how many people start working from again as the perceived threat level rises.

I wonder how rationally people consider the pandemic. The vector for the rise in infections is schoolchildren being children – their interactions will diminish this week due to mid-term holidays. Back in September, a British Medical Journal report (How is vaccination affecting hospital admissions and deaths?) said 84% of hospital admissions before July had not been vaccinated, although rates of vaccinated infections were rising – their conclusion was simple: unvaccinated people are 3 times as likely to go to hospital and 3 times more likely to die. There is a broad consensus the efficacy of vaccines wanes after 5-6 months – hence booster shots.

Maybe the best way to move forward is the Swedish solution of taking personal responsibility to rising infection numbers? However, research in the Guardian earlier this year suggests that strict-lockdown Denmark and easy-going Sweden experienced similar levels of economic dislocation, but Sweden suffered a death rate 5 times higher than Denmark! It’s down to behaviour – Sweden kept the schools, offices, shops and pubs open, but people got careful, stopped going out and kept the kids at home anyway.

As the supply chain crisis continues, and energy prices go through the roof, we already know it’s going to be a tough holiday season – retailers warning of toy shortages and price hikes on scarce Turkeys. It impacts consumer behaviour – we all want to spend, but if we can’t because of rising prices and falling incomes, and it feels dangerous to do so – then what effect does that have on spending patterns? It’s got to be negative.

We’re seeing the supply chain effects beginning to hit corporate results – an increasing number of firms have been giving lacklustre holiday earnings guidance. Intel took a spanking last week on the back of expectations of a downbeat outlook. Snap got pummelled on the back of a disappointing Q3 number. This week is big for Big Tech earnings – and names from Apple to Amazon could be pummelled by supply chain shortages and the problems these cause meeting holiday demand.

Headlines about a downbeat Apple sales forecast have consequences – not just in making global consumers a little more depressed about the future.

The very first thing junior economists learn about is multiplier effects – on consequences as lay-people call them. A company finds it can’t get it full allocation of Christmas units to sell so it cuts advertising, cuts stuff overtime and starts planning to cut investment in new plants, warehouses and future spending. Repeat over the whole economy, and with everyone with less in their pockets… as “transitory” inflation feels increasingly permanent, and you’ve got a perfect recipe for stagflation.

I often get accused of being a misery-guts and far too negative about the state of the global economy. My own market mantras include the classic: “Things are never as bad as you fear, but never as good as you hope”.

Think about that for a moment. Covid caused the greatest economic downspike in 300 years, but the actions of swift government interventions to prop up commerce and fuel consumer spending kept the global economy functional, but wobbly. The markets quickly began to anticipate recovery and upside – yet these remain vulnerable to the news and perceptions around this Coronavirus.

Covid fears are multiplying again. Renewed Covid instability on the back of lockdown news from China, Europe, Australasia, wherever, will continue to roil markets. Supply chains remain fractured and the consequences of the virus effects on the global economy will continue.

Get used to it…

Tyler Durden
Tue, 10/26/2021 – 03:30



Author: Tyler Durden

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Economics

The Gaslighting Of America

The Gaslighting Of America

Authored by Bob Weir via AmericanThinker.com,

I remember a comedy skit several years ago in which a woman comes…

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The Gaslighting Of America

Authored by Bob Weir via AmericanThinker.com,

I remember a comedy skit several years ago in which a woman comes home unexpectedly and finds her husband in bed with another woman.  Shocked, she demands to know who the woman is and why her husband is doing this.  The couple get out of bed and start getting dressed as the man says to his wife, “Honey, what are you talking about?” The wife, perplexed at the question, says, “I’m talking about that woman!”  Meanwhile, the other woman, now fully dressed, heads for the door.  The husband says, “What woman?  Honey, are you feeling okay?  There’s no woman here.”  Feeling dazed and confused, the wife begins to question her own sanity.

That’s a pretty good example of what the Biden administration is pulling on the psyche of the American people.  

What they’re doing is not merely “spin,” which has become SOP whenever a political party does a clever sales job on the public in order to keep certain facts from them.  No, this is much more than shrewd marketing; this is blatantly lying in the public’s face and telling them they’re crazy if they believe their own eyes.  

When we look at videos showing thousands of migrants coming across our southern border with impunity, while Biden and his cohorts tell us they have the situation under control, we’re being gaslighted.

When thousands of Americans and Afghan allies are abandoned to be tortured and killed by Taliban terrorists, while Biden’s press secretary, Jen Psaki, tells us the war ended successfully, we’re being told not to believe what we’re seeing.  

President Trump made our country energy independent, only to have his success overturned by Biden on day one of Biden’s presidency.  That forced our country to once again be dependent on foreign oil.  Biden said his action would help protect the environment.  We scratch our heads and wonder how it makes sense to ship millions of barrels of oil on cargo ships from thousands of miles away, only to be used the same way it was used when it was processed here.  

Does foreign oil have less environmental effect than American oil?

When Biden proposes a $3.5-billion “infrastructure bill” that is heavily weighted toward social engineering and radical “Green New Deal” initiatives, we’re told that everything is infrastructure.  

We’re also told that the massive spending bill will cost “zero dollars” because the new taxes will be assessed only on the wealthy.  

Then, to add more consternation to a public getting groggy trying to keep up with twelve-digit numbers, Biden and his accomplices want another $80 billion for the IRS so its agents can check into every bank account that has transfers of $600 or more.  As if the IRS weren’t already a liberty-crushing organization, Biden wants to provide it with more ammo to use against those who oppose him.  Nevertheless, we’re told it’s going after only tax cheats.  Why would these people need $80 billion more to do what they’ve always done?  Don’t ask, lest you get audited for questions they don’t want asked.

When the supply chain of cargo ships, carrying about a half-million shipping containers filled with goods from all around the globe, are stalled in the waters outside major American port cities, we’re told by White House chief of staff Ron Klain that it’s just “high-class problems.”  

In other words, only the wealthy are waiting for the goods to arrive at stores.  Moreover, Jen Psaki mocks it as the “tragedy of the treadmill that’s delayed” — another elitist poking fun at the reasonable expectations coming from the working class.

The list of gaslighting incidents is growing longer than Pinocchio’s nose. 

Each time we are faced with another destructive lie, our attention is diverted to the latest Trump investigation or the probe of one of his supporters.  Keeping the January 6 imbroglio alive is one of those diversions.  The radical left has come to power by a sinister display of distractions from reality.  A major part of that distraction is using accusations of racism to muzzle opposition.  Most people will cower in fear of such labeling, even when they know in their hearts it’s not true.  That’s precisely what makes the accusations so useful to those who seek power through intimidation and distortion of reality.  

President Trump called out situations for what they are, without the odious and murky filtration of political correctness.  That’s why the entrenched powers of Deep State corruption despised him.  

Now we’re stuck with a president who says “what inflation?” as we pay higher prices than ever at the gas pump and the supermarket.  I seriously doubt that shoppers are questioning that reality.

Tyler Durden
Mon, 10/25/2021 – 21:10

Author: Tyler Durden

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Economics

The U.S. Budget Deficit

#CKStrong The U.S. Treasury findly released their monthly statement on Friday, which closed the books on the government’s 2021 fiscal year (October to…

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#CKStrong

The U.S. Treasury findly released their monthly statement on Friday, which closed the books on the government’s 2021 fiscal year (October to September).  The deficit came in at $2.8 trillion (12.0 percent of GDP, based on our Q3 GDP estimate) , a bit lower than FY 2020’s $3.1 trillion (14.8 percent of GDP).  Those are some massive deficits, folks. 

 

U.S. Deficit Larger Than 95 Percent Of Global Economies

In fact, the FY 2021 deficit was larger than Italy and Canada’s economy, bigger than 185 of the 192 country economies in the lastest IMF database.  Take a look at the peak 12-month deficit of $4.1 trillion in March.  The March deficit would have made the G5. 

This image has an empty alt attribute; its file name is usg_deficit_3.png

Financing The COVID Deficit

How can the U.S. Treasury finance $5 trillion in borrowing over the past 18-months without spiking global interest rates, crowding out investment and other asset markets, and tanking asset prices?   They can’t.  

The table below breaks down the financing in several different measures.  Check it out.

The bottom line is that 23 percent of the COVID deficit borrowing has been financed by an increase in Treasury bill issuance, easy given the mass excess liquidty on the short-end where the Fed is soaking up over a trillion with overnight reverse repos in order to keep short-term rates postives.  Most of that liquidity, by the way, was created from QE.   

Of the remaining $4.1 trillion of non T-Bill debt issuance, 75 percent was taken down by the Fed, albeit indirectly.   

No Judgement

There you have have it, folks, T-Bills and the Fed have financed the bulk of the COVID deficit and debt buildup.   No judgment, but policymakers are now going to have engineer a soft landing in the economy and asset markets as we approach a fiscal cliff to normalize the budget deficit and tighten up monetary policy. 

We are not throwing stones as they saved the world from a global economic castasophe.

We do criticize their continued irresponsible policies as inflation rages and stagflation sets in.  It’s not wise, in our experience, to try and monetize supply shocks.  We learned that hard and painful lesson by doing so with the OPEC oil shocks.  

Narrow window for a soft landing.  Stay tuned. 

Email us or comment if you have questions.  








Author: macromon

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