22.8 C
Nicosia
Thursday, March 28, 2024

The mistake with inflation

Must read

To & lambda & om; & epsilon; & tau; & omicron; & nu; & pi; & lambda; & eta; & theta; & omega; & rho; & iota; & sigma; & mu; ό

Everything in life is judged by the result and by the result the central bankers around the world were wrong about inflation. The need not to disrupt the recovery of economies in 2021 after the recession shock of 2020, due to the closure of economies for several weeks in order to limit the spread of the coronavirus pandemic, led to the maintenance of a wrong monetary policy.

Measures to curb the money supply to the economy and raise interest rates should have started last summer. The central bankers and the majority of economists and analysts made a miscalculation based on a logical conclusion: inflation was the result of temporary supply disruptions. Indeed, inflationary pressures are largely due to energy costs. The prevailing view was that this disorder was temporary. The additional question that should have been asked in the analysis is “what will happen if in the end the disorder is not temporary?”. And there were indications before us that it was not temporary.

First, the rise in energy prices was triggered by the reluctance of OPEC countries not to increase oil production to pre-pandemic levels. The strong recovery boosted demand for energy, but supply did not follow. The OPEC countries (and Russia) found a golden opportunity to dramatically increase their revenues. If there is a lesson to be learned from the attitude of the OPEC countries, it is that solving global problems requires all players to be behind the solution. If oil production had increased last year, the situation today would have been different.

Second, commodity prices were moving upwards before the pandemic broke out. Indicatively, the price of wheat has increased 156.27% in the last three years.

Central banks were “misled” by the narrative of the temporary turmoil and the rapid recovery of economies. The recovery, however, was also fueled by ample liquidity through government support programs. Rising savings, a pan-European phenomenon, have armed households with resilience to withstand inflationary pressures so that they can be sustained.

The question now is what do we do from here on out. Trying to curb inflation amid the uncertainty caused by the war in Ukraine (de-escalation is not visible) will be painful. This effort requires restrictive policies. The cessation of the quantitative easing program and the rise in interest rates, with Christine Lagarde now leaving open the possibility of interest rate hikes starting in the summer, inevitably leads to a reshaping of economic policy. In this new phase, the state acquires a leading role by supporting infrastructure investments and implementing reforms. The private sector will inevitably shrink so that declining demand will drive down prices.

Source: politis.com.cy

- Advertisement -AliExpress WW

More articles

- Advertisement -AliExpress WW

Latest article