Global: The “Last Mile” Challenge of Suppressing Inflation
2023-11-15
■ Since November, the global view of stopping interest rate hikes has been spreading
■ The current slowdown in inflation is mainly affected by the significant contribution of energy, and inflation suppression may not necessarily advance linearly
Since November, the global view of stopping interest rate hikes has been spreading. The reason behind this is that after the release of US employment statistics in October, the unemployment rate increased from 3.4% in April to 3.9%, clearly indicating the weakness of the labor market; Pill, Chief Economist and Policy Commissioner of the Bank of England (BOE), did not deny the market's expectation of interest rate cuts starting from August next year in an online event on the 6th, leaving the possibility of adjusting the monetary policy stance; The Reserve Bank of Australia (RBA) announced a 0.25% interest rate hike decision at its board meeting on November 7th and revised the guidelines in the statement, indicating a neutral monetary policy stance. Central banks are gradually transitioning to maintaining a tight financial environment by raising real interest rates.
However, central banks around the world believe in their latest economic outlook that the Federal Reserve (FRB), European Central Bank (ECB), RBA, and others assume that inflation rates will continue to exceed 2% by 2025. I have paid attention to the content of the speech delivered by ECB member Schnabel on the "last mile" of inflation suppression on the 2nd of this month. In her speech, he pointed out that in about 90% of past inflation cases, inflation significantly slowed down within three years after the first shock, but either remained at a high level or accelerated again thereafter. One reason she mentioned is that the fundamental effect had a significant impact on inflation over two years, which became an obstacle in the inflation suppression process. In addition, considering that the transmission of energy prices will lead to widespread price increases in goods and services, and determine the basic trend of prices, she organized the changes in the inflation suppression process, emphasizing that it is not through a numerical decrease in inflation rate, but by ensuring a steady decrease in the basic inflation rate to change the inflation suppression process, which is the "last mile". In this understanding, she advocates that the secondary ripple effect of supply-side shocks should not be used as the basis for fixing the inflation rate, which is a challenge for monetary policy.
The observed slowdown in inflation is mainly due to the significant contribution of the fundamental effect of last year's increase in energy prices. Although the rate of price increases for goods and services is gradually slowing down, the underlying effect of energy prices in the future will gradually weaken, so the inflation suppression process, as pointed out by the Schnabel ECB member, may not necessarily advance linearly. Apart from the increase in market interest rates, there has been no substantial change in the premise of monetary policy, and inflation is still expected to exceed 2% by 2025. Therefore, it is still too early to believe that the timing of transitioning from monetary tightening is approaching.
■ The current slowdown in inflation is mainly affected by the significant contribution of energy, and inflation suppression may not necessarily advance linearly
Since November, the global view of stopping interest rate hikes has been spreading. The reason behind this is that after the release of US employment statistics in October, the unemployment rate increased from 3.4% in April to 3.9%, clearly indicating the weakness of the labor market; Pill, Chief Economist and Policy Commissioner of the Bank of England (BOE), did not deny the market's expectation of interest rate cuts starting from August next year in an online event on the 6th, leaving the possibility of adjusting the monetary policy stance; The Reserve Bank of Australia (RBA) announced a 0.25% interest rate hike decision at its board meeting on November 7th and revised the guidelines in the statement, indicating a neutral monetary policy stance. Central banks are gradually transitioning to maintaining a tight financial environment by raising real interest rates.
However, central banks around the world believe in their latest economic outlook that the Federal Reserve (FRB), European Central Bank (ECB), RBA, and others assume that inflation rates will continue to exceed 2% by 2025. I have paid attention to the content of the speech delivered by ECB member Schnabel on the "last mile" of inflation suppression on the 2nd of this month. In her speech, he pointed out that in about 90% of past inflation cases, inflation significantly slowed down within three years after the first shock, but either remained at a high level or accelerated again thereafter. One reason she mentioned is that the fundamental effect had a significant impact on inflation over two years, which became an obstacle in the inflation suppression process. In addition, considering that the transmission of energy prices will lead to widespread price increases in goods and services, and determine the basic trend of prices, she organized the changes in the inflation suppression process, emphasizing that it is not through a numerical decrease in inflation rate, but by ensuring a steady decrease in the basic inflation rate to change the inflation suppression process, which is the "last mile". In this understanding, she advocates that the secondary ripple effect of supply-side shocks should not be used as the basis for fixing the inflation rate, which is a challenge for monetary policy.
The observed slowdown in inflation is mainly due to the significant contribution of the fundamental effect of last year's increase in energy prices. Although the rate of price increases for goods and services is gradually slowing down, the underlying effect of energy prices in the future will gradually weaken, so the inflation suppression process, as pointed out by the Schnabel ECB member, may not necessarily advance linearly. Apart from the increase in market interest rates, there has been no substantial change in the premise of monetary policy, and inflation is still expected to exceed 2% by 2025. Therefore, it is still too early to believe that the timing of transitioning from monetary tightening is approaching.