Posted May 30, 2022
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Inflation lied, it didn’t do what it promised. When she was supposed to run out of steam, she accelerated even more. Yesterday, it was the rise in energy prices, then durable goods prices, today food prices, and tomorrow wages? Certainly, Poutine was not planned, nor the reconfinement Chinese. In general, we had naively believed that supply would hasten to adjust to demand once the world is deconfined, in order to avoid tensions on the prices of goods that are too scarce. As a result, inflation is now uninhibited following 40 years of marmoreal silence.
On the other hand, there is the well-behaved central banker, who uses the formula to reason wild inflation. As if the substance might convince the form that it exaggerates. The central banker does not intend to be carried away by the emotion of the man in the street. He proposes reason to keep and move forward like Mr. Homais. Thus, the central banker tells us regarding a gradual normalization of monetary conditions which until now were ultra-accommodative. At the risk of making people yawn, he even speaks of a zero rate returning to a rate neutralwhich is not the same thing at all: the zero rate refers to the cost of free money (so zero), while the zero rate neutral is said of a monetary policy that is neither too much nor too little accommodating or restrictive, just what is needed.
A priori, there is therefore a gap between the savagery of inflation and monetary restraint. This may bring to mind the myth of lace wars where the practice of the trumpet was considered as important as the handling of weapons in winning the war. As a symbol, we had to wait for the Age of Enlightenment to realize that the trumpet is nice, but weapons are better if you want to win. Is the Central Bank waging a lace war once morest inflation? One might think so in view of the monetary tinsel proposed to fight once morest the aggressor: an increase in the key rates of the ECB perhaps in July, less purchases of securities… Of course, we do not discuss cooking with a cannibal, as would say the other. In other words, it is not up to the Central Bank to behave like wild inflation, but up to inflation to finally obey the canons of monetary policy rules.
The Central Bank conducts a loose monetary policy
But in truth, if the Central Bank conducts a loose monetary policy, it is not out of snobbery, it is a necessity.
Indeed, to effectively curb galloping inflation, the central banker is forced to pull vigorously on the economic bridle. In economic language, we must then understand that since supply has failed to adjust to demand, it is demand that will make the effort. However, the risk is then to break an economic growth in china barely recovered from the covid, and to explode financial markets on edge. So you need measure, dosage, you need just what you need, even almost less so as not to provoke fate. In fact, you have to be tactful, a clever mix of firmness and delicacy. However, fingering is a practice that cannot be invented, you must have used it to master your gesture. Problem, it’s been so long since the Central Bank has seen the inflationary wolf.
However, at some point the Central Bank will also have to show its teeth. Even if deep down she dreams of being a kind wolf, this wolf who blows on the stone house so as not to leave our pig without a roof, which eradicates inflation without destroying growth.