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Not the right time to be excited about inflation

The current panic about inflation may keep wages low and jeopardize our economic recovery

Inflation is Rishi Sunak’s worst nightmareEconomists are usually afraid of inflation-rising prices will reduce the purchasing power of our currency. Rapidly rising prices will reduce consumption and destabilize the economy. The inflation rate in May was slightly higher than that of the Bank of England 2% target to 2.1%, Is this nightmare becoming a reality?

In the U.S, Joe Biden’s massive stimulus Because of concerns about the potential for inflation, measures to boost the US economy are under scrutiny.In the UK, this alert is used to prove Government’s reluctance Provide your own huge economic stimulus.Former President of the Bank of England Mervyn King Chief Economist, Bank of England Andy Haldane Warn us of the danger of inflation.

Destructive levels of inflation are actually unlikely at the moment. If we use standard inflationary suppression policies to react too much to inflationary pressures, we may suppress the recovery. Our fear of inflation prevents us from solving more important issues, such as low wages and the climate crisis.

As shown in the chart below, the Bank of England’s own forecasts indicate that by 2024, since the beginning of the pandemic, the UK’s average inflation rate will be lower than the target inflation rate—even if interest rates remain the same. Even without any tightening of monetary policy—such as raising interest rates—we don’t seem to be on the path of spiraling inflation.

In fact, on average, lower than the target inflation rate is not desirable.Many economists believe that moderate inflation above the target is health with feasible A sign of recovery because it shows that demand is growing. Allowing inflation to balance or overshoot helps ensure that demand and economic growth are not immediately suppressed.

These ideas are not so controversial in the field of monetary policy. The Fed targets average inflation with The Bank of Japan’s goal is to over-adjust. If we take the same approach and target Average Inflation, which means aiming Overshoot The inflation rate is higher than our current level so that the long-term average can return to the target. Greater economic stimulus may help achieve this goal.

Many conditions currently driving inflation seem to be temporary. The price increase is because Consumer demand picks up After a period of lockdown and pandemic-related Global supply shortageAs demand stabilizes and supply issues stabilize or resolve, these inflationary pressures may subside.In addition, many of these supply issues are caused by Lack of investment In the enterprise. When investors have no confidence in high levels of demand, underinvestment often occurs. Therefore, when we try to solve the inflation caused by these problems through policies that soften demand and increase investment costs, we are deceiving ourselves.

In addition to short-term consumer demand and supply chain issues, the long-term situation also means that we are unlikely to see inflation continue to rise for a long time.Andy Haldane worried about inflation because he worried that it would create something called Wage price spiral“This is when high prices cause workers to bargain to raise wages. These higher wages will lead to increased demand, which will cause prices to rise again and continue the cycle.

But this phenomenon is unlikely: it falls on Joint density In the past few decades, our economy Increasingly dependent on unstable labor Reduces the power of workers, so Make it harder for wages to react to pricesThis shows that not all causes of low inflation are necessarily good. As shown in the chart below, since 2008, wage increases have not kept pace with rising prices.

We should not let our fear of inflation stop us from working to raise wages. Although a wage price spiral is unlikely, as long as wages rise above inflation, moderate inflation with inflation above the target is not necessarily a bad thing.Given Higher real wages may stimulate productivity, Wage increases will not automatically translate into price increases.By next year 32% of Britons Will live under socially acceptable living standards.If we want to improve the standard of living, we need The increase in wages is greater than the increase in prices.

Safer work and higher wages are good things, even if the cost is slightly higher inflation.Although currently Labor shortage with The number of union members has increased recently Helping tipping is good for workers, and we need more ambitious policies to provide people with Living income And give workers more power in the job market. Yes, this may lead to a spiral increase in real wage prices and higher sustained inflation-but it also shows that the reasons for rising inflation are not necessarily bad. Once this happens, it may make sense to respond to anti-inflationary pressures to reduce demand-but as shown in the figure above, there is no sign that this will happen soon.

Joe Biden recognized this recently,Say Wage increases are not a problem; they are “a feature of” U.S. large-scale economic stimulus. Current stimulus measures in the UK Pale in comparison, Which makes it more difficult for us to solve problems such as poverty, inequality, the economic trauma caused by the climate crisis and the pandemic-all of which are currently much larger than inflation.

Inflation should not be a nightmare for the Chancellor of the Exchequer. It certainly should not be a weird person who used to oppose larger government stimulus plans or now raise interest rates.This Many people experienced loss of income during the pandemic Has become a nightmare for many people. As long as we aim for wages to exceed rising prices, inflation will not be so terrible.

Image: Pexels

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