War and wrong sort of inflation bring back memories and lessons of the sixties

 Return of guns and butter: war, inflation and central banks

Lessons of the 1960s – how William McChesney Martin’s errors could haunt Powell, Lagarde and Bailey

Russia’s invasion of Ukraine is coinciding with persistent inflation, fuelled by surging energy prices, just as during the height of the cold war, writes David Marsh.

THE world’s three most widely followed central banks – the Federal Reserve, European Central Bank and Bank of England – have all got their inflation forecasts spectacularly wrong over the past 12 months. Jerome ‘Jay’ Powell, Christine Lagarde and Andrew Bailey all admit this. They lay the blame on faulty diagnosis of economic dynamics at the end of the Covid-19 crisis as well as on collective complacency about what was seen as a ‘temporary’ spike in energy prices last year. A statement in July 1969 by William ‘Bill’ McChesney Martin – Fed chair in 1951-70, much vaunted as an inflation-fighter, but a man who ultimately failed in his mission – could turn out to haunt present-day central bankers. ‘The System was overly hasty in moving toward ease in the summer of 1968, in part because of faulty judgments but also because of faulty projections.’

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-Wrong sort of inflation

Legacy of quantitative easing could be part of the problem, write Neil Williams and Taylor Pearce, OMFIF.

It was inevitable, even before Russia’s invasion of Ukraine, that Brexit shortages, the reopening of economies, and soaring utility and commodity prices would spark inflation. An unleashing of pent up demand outstripping the pace of supply chain repair on top of base effects (after prices were contained in 2020) have taken inflation measures to decadal highs.

But with wage inflation lagging and stagflationary forces building, what we’re left with might be the wrong sort of inflation – cost- rather than demand-led. For central banks, the dilemma, as in 2011 with surging oil and food prices, will be to avoid stalling the recovery as they raise rates. And for highly indebted governments, craving demand inflation may be easier than sustaining it.

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Πηγή: omfif.org

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