Inflation could be a problem that will not disappear, being more likely to persist and lead to a crisis in the coming years, according to a warning of the economists of the German bank Deutsche Bank, CNBC reports, according to news.ro.
In an estimate that far exceeds the consensus of the authorities and Wall Street, Deutsche Bank has issued a stern warning that focusing on stimulus measures and dispelling fears about inflation will prove to be a mistake, if not in the short term. 2023 and beyond.
The analysis refers in particular to the US Federal Reserve and its policy that will tolerate high inflation for the sake of a full and inclusive recovery.
According to Deutsche Bank, the Fed’s intention not to tighten monetary policy until inflation accelerates sustainably will have a serious impact.
“The consequences of the delay will be a major disruption to economic and financial activity, unless the Fed acts in the end. Instead, it could create a significant recession and trigger a chain of global financial turmoil, especially in emerging markets, “wrote Deutsche Bank chief economist and other financial institution economists.
As part of its inflation policy, the Fed will not raise interest rates or reduce asset purchases until it sees “substantial progress” toward its inclusive targets.
Several central bank officials said they were not close to those targets.
Meanwhile, indicators such as consumer prices and personal consumption spending are well above the Fed’s 2% inflation target.
Central bank officials say the current acceleration in inflation is temporary and will slow when the disruptions caused by the coronavirus pandemic in supply chains disappear.
Deutsche Bank analysts disagree with this view, saying that aggressive stimulus measures and fundamental economic changes will generate inflation that the Fed is not prepared to fight.
“It may take another year, until 2023, but inflation will return. And while it is admirable that this patience is due to the fact that the Fed’s priorities are moving toward social goals, neglecting inflation levels makes the world sit on a time bomb. The effects could be devastating, especially for the most vulnerable in society, “warns Folkerts-Landau.
Deutsche Bank’s position is not widely shared by economists.
Most Wall Street analysts agree with the Fed’s view that current inflationary pressures are transitory and doubt that monetary policy changes will take place any time soon.
Jan Hatzius, chief economist at Goldman Sachs, said there were “strong reasons” to support the Fed’s position. One of them he mentions is the likelihood that the expiration of increased unemployment benefits will send workers back to work in the coming months, reducing wage pressures. As for price pressures, Hatzius said they will fall and get closer to normal.
“All of this suggests that Fed officials can only follow their plan to step out of their current relaxed policy position,” Hatzius wrote.
This policy will be a mistake, according to Deutsche Bank.
The US Congress has so far approved more than $ 5 trillion in pandemic incentives, and the Fed has nearly doubled its balance sheet through monthly asset purchases to nearly $ 8 trillion.
Incentives continue to be given, even with an economy that is expected to grow at a rate of about 10% in the second quarter and create, on average, 478,000 jobs per month in 2021.
“I have never seen such a coordinated expansionary fiscal and monetary policy. This will continue as production exceeds potential, “said Folkers-Landau.
The Deutsche team believes that future inflation could be similar to the experience of the 1970s, a decade in which inflation averaged almost 7%, being even double-digit at various times.
Rising food and energy prices, together with the abandonment of price controls, contributed to the intensification of inflation during that period.
Paul Volcker, the then Fed chairman, led the effort to counter inflation, but had to use dramatic interest rate hikes, which triggered a recession.
The Deutsche team is concerned that such a scenario could happen again.
“Already, many sources of rising prices are infiltrating the US economy. Even if they are transient on paper, they could fuel expectations, just as they did in the 1970s, ”they said.
“The risk is that even if only a few months are incorporated, they can be difficult to control, especially with such high incentives.”
According to Deutsche Bank, interest rate hikes “could wreak havoc in a world with high debt”, probably with financial crises, especially in emerging economies, where growth will not be able to exceed higher financing costs.
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