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September 2023
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September 2023
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Analysis: Have inflation fears been inflated?

By Paul Mackintosh   
March 29, 2023

Inflation keeps dominating financial headlines. UK consumer prices were up 10.4% year-on-year in February after reaching a 41-year high last October. Australian inflation has reached a 30-year high. Japan’s consumer price inflation eased somewhat in February but only after hitting a 41-year high.

Economist and financial prognosticator Nouriel Roubini has warned of not only a severe recession but also of a potential stagflationary crisis, criticising the “huge buildup of debt” worldwide, driven by the cheap money policies following the global financial crisis. “It’s too late to find a solution that prevents a hard landing and prevents severe financial stresses,” he said on Bloomberg.

Meanwhile, the US Federal Reserve raised its benchmark overnight rate by 25 basis points on March 22. Fed Chair Jerome Powell made it clear in remarks after the decision that the central bank was taking notice of stress in the banking sector, with a strong implication that it would have gone for a 50 basis point increase absent the banking turmoil.

That said, the decision to continue raising rates implied that the financial system could withstand further increases. According to the central bank’s interest rate statement, its rate-setting committee “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time”.

Between panicky bank investors and the likes of Elon Musk berating the Fed for hiking rates at all, one might take the view that the central bank is actually managing to thread the needle and bring inflation under control while avoiding further financial stress.

It’s worth considering how bad inflation actually is. No one wants a return to Germany’s hyperinflation of the 1920s, or the stagflation of the 1970s. But has the persistent low interest rates and cheap money in the aftermath of the global financial crisis really been that good for the economy, or society? Do we really want it back?

After all, it’s led to multiple speculative bubbles, growing inequality, and some investment sectors, such as private equity, mushrooming while heavily dependent on those conditions. The current inflationary stresses in the global economy have exposed all kinds of weaknesses in the banking sector and elsewhere.

It’s clear that this is due to the rock bottom interest rates and cheap money policies that have prevailed since the financial crisis, which Roubini rightly dismissed as kicking the can down the road. Perhaps an inflationary environment, so long as it’s managed, isn’t that unhealthy after all.