Curbing the Inflation Virus

With prices in many advanced economies continuing to rise at their fastest annual rate in decades, the current inflationary surge clearly is not transitory. But while central banks may have contributed to the problem by initially not reacting quickly enough, many think they should not be solely responsible for solving it.

In this Big Picture, Jason Furman of Harvard University urges the US Federal Reserve to stick to its plan of rapid interest-rate hikes until wage and price increases are no longer feeding into each other. But Yale University’s Pinelopi Koujianou Goldberg argues that reducing America’s high inflation rate will require measures to ease supply-side bottlenecks and increase the number of available, willing workers. And Michael R. Strain of the American Enterprise Institute calls on US President Joe Biden to lift the tariffs that his predecessor Donald Trump imposed on goods imported from China.

Although eurozone inflation is close to the US level, Daniel Gros of the Centre for European Policy Studies notes how an emerging new social contract – whereby governments protect households from the bulk of higher energy costs, in exchange for workers moderating their wage demands – is helping to prevent a 1970s-style wage-price spiral. China, by contrast, has kept inflation under control. But Zhang Jun of Fudan University agrees with policymakers’ view that, while economic stimulus is urgently needed, too much of it would risk triggering a surge in price growth.

And yet, while policymakers and publics now recognize the growing risk that inflation will remain persistently high, Anatole Kaletsky of Gavekal Dragonomics notes that hope dies last in financial markets, warning that investors’ overly sanguine outlook for prices and interest rates reflects four cognitive biases.