Macroscope | Scary as it is, the argument that inflation is here to stay is winning

Name: Japan beef bowls and coffee costing more as workers feel the pinch from food price hike
Uploaded: 2021-11-28T19:45:14.000Z
Duration: 3 min 17 s
Description: Japan beef bowls and coffee costing more as workers feel the pinch from food price hike

As the IIF warns of a global inflation storm, the fear is that raising interest rates in response could spark a recession – when governments and central banks are out of ammunition

Reading Time:3 minutes

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Prices are displayed on a board at a petrol station in Staten, New York, on November 10. The US consumer price index, which includes petrol prices, has risen 6.2 percent from a year ago, to its highest level since December 1990. Photo: EPA-EFE

Anthony Rowley

Published: 3:45am, 29 Nov 2021

The inflation debate continues to rage and the Institute of International Finance (IIF), an association of many of the world’s biggest financial institutions, is talking of a “perfect global inflation storm”. Inflation has moved from the realm of fantasy into the realm of fear.

I wrote on this subject a week ago, but it is time to take “One Step Beyond” (to borrow the title of a 1950s US TV series) and imagine what might happen if an inflation-induced recession does occur. As with many episodes of the TV series, speculating on this could be a rather scary experience.

Let us suppose that inflation continues to accelerate rather than abate, and that rises in interest rates to halt its progress create a financial and “real” economic recession with a slump in stock markets, real estate and other markets, as well as in economic activity and employment.

This could prove to be one of those dream- or nightmare-like situations where the levers of power move slackly in the hands of policymakers, rather than with the feeling of firm contact with the economy, and when policy actions are about as effective as pushing on a piece of string, a saying attributed to John Maynard Keynes.

If further monetary stimulus were to be applied in such circumstances, it would be tantamount to “piling sin upon sin” (to quote a Biblical phrase from Isaiah) – and it simply would not work anyway. You cannot reinflate a burst bubble by blowing into it.

03:17

Japan beef bowls and coffee costing more as workers feel the pinch from food price hike

As for further fiscal stimulus, governments have borrowed to the hilt to finance Covid-19 handouts and are in no position to play the white knights in a recession. We are about at the end of the road when it comes to “financing” our way out of trouble.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Scary as it is, the argument that inflation is here to stay is winning

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;} As the IIF warns of a global inflation storm, the fear is that raising interest rates in response could spark a recession – when governments and central banks are out of ammunition

Macroscope | Scary as it is, the argument that inflation is here to stay is winning

As the IIF warns of a global inflation storm, the fear is that raising interest rates in response could spark a recession – when governments and central banks are out of ammunition