The Elusive Pursuit of Inflation

  • Weak demand culprit for low inflation in advanced economies, panelists say
  • Signs that unconventional monetary policy is working
  • Emerging markets need smart policies and robust economies to withstand spillover effects
  • With core inflation in Europe, Japan, and the United States well below their target levels, two out of three central banks are currently expanding quantitative easing and one is signaling a slower exit.

    Top economists discussed the causes of low inflation, the tools to raise it and the implications for global currency movements in a seminar on “The Elusive Pursuit of Inflation” at the IMF-World Bank Spring Meetings.

    Diagnosis and prognosis

    Demand is weak at the global level and output is well below potential in major advanced economies. But the panelists saw reasons for optimism. They expected Europe, Japan, and the United States to make progress over the course of this year and the next.

    In the United States, the inflation rate had been rising before the drop in energy prices had a “massive but temporary effect”, according to Stanley Fischer, Vice-Chair of the Federal Reserve Board. Amid signs that wages are increasing, he said he expected the U.S. to move towards 2 percent inflation over the next couple of years.

    David Lipton, First Deputy Managing Director of the IMF, noted that the U.S. economy was on the upturn and said lower energy prices would have a positive effect on spending in Europe. “The risk of a prolonged deflationary episode is diminished,” he said, while advising caution.

    Peter Praet, member of the European Central Bank’s Executive Board, agreed that the output gap was closing but regretted that the opposite was happening in many emerging markets. He noted that a sequence of shocks on the supply side had made for a difficult analysis.

    It takes a “big push” to escape a deflation trap, according to Takatoshi Ito, Professor at Columbia University. After 15 years of deflation and low expectations in Japan, it was a “significant achievement” to raise inflation from −0.5 percent in 2013 to 1.5 percent in 2014. Inflation has since slipped back to zero. In his view this is largely due to the fall in energy prices, rather than a failure of monetary policy.

    Monetary policy working, more action needed

    All panelists spoke positively of the effects of unconventional monetary policy: quantitative easing and accompanying measures. None saw current policies as presenting a significant risk to financial stability. They...

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