The debate in developed economies: Is inflation dead?

If the economy was literature, the history of inflation would be a fascinating mysterious novel. Has inflation perished from natural causes – a weak economy, for example? Has it been finalized by central banks, with high interest rates as a deadly weapon? Or is not she dead at all, but only on the lookout, to come back soon with a vengeance?

Like any good crime novel, he has a twist. What would happen if the apparent defeat of inflation affected the central banks themselves by making them seem exhaustible? Far from being hired for a job well done, they are subject to a populist attack. "If the Federal Reserve had done its job properly, which it did not do, the stock market would have gone from 5,000 to 10,000 additional points and the GDP would have been well above 4% instead of 3% … with almost zero inflation, "said President Donald Trump on Twitter on April 14th. On April 5, citing Freddie Mercury, he said "you would see a rocket" if the central bank relaxed.

The irony of Trump's criticisms with regard to the Federal Reserve is that, by historical standards, the bank is remarkably moderate, that is, that it is prone to keep the rate low. After decades of working to reduce inflation, even at the cost of inducing recessions and ultimately succeeding, central bankers in developed economies have spent most of the last 10 years reverting back and forth. try to revive it, with very little success. At a press conference held March 20, Federal Reserve Chairman Jerome Powell said that low inflation was "one of the biggest challenges of our time."

As Powell acknowledges, it is difficult to explain persistent inflation with standard macroeconomic theory. Price pressures were weak after the global financial crisis due to a marked slowdown in the economy, which included the unused capacity of factory workers. What is astonishing now is that even after one of the longest economic expansions in US history and with the unemployment rate approaching the lows of half a century, the rate of inflation remains weak. The Federal Reserve has not repeatedly reached the target set in January 2012 of an annual change of 2% of the price index of personal consumption expenditure. Once volatile prices for food and energy have been eliminated, inflation has reached 2% only one month (July 2018) over the last seven years.

Recently, in January, Powell said the economy seemed strong enough to support two quarter-point rate increases in 2019, in addition to the four increases set by the Federal Reserve last year. But inflation has again been below expectations of the Federal Reserve and the two 2019 rate increases have been eliminated from the average estimate of bank policy makers.

While Venezuelan type five-digit inflation is destructive, a slight inflation inflates the wheels of trade. This gives companies the opportunity to stealthily reduce workers' wages with worse results, because keeping them flat is equivalent to reducing real wages. Some inflation is also useful for central banks as it helps them to fight recessions. To stimulate debt, they like to reduce their key rates well below the rate of inflation. But they can not do it if the rate is just above zero. An unexpected drop in inflation also punishes borrowers by further increasing their debts.

So, who or what killed the inflation? It is becoming increasingly obvious that the killer was not the Federal Reserve, the European Central Bank or the Bank of Japan, even though central bankers tended to believe that Milton Friedman asserted that inflation is "always and always everywhere a monetary phenomenon". Researchers find that low inflation is largely a consequence of globalization, automation or deindicalisation – or a combination of all three – that undermines the power of workers to negotiate higher wages.

In other words, the capitalists have killed inflation. In the decades following the Second World War, Polish economist Michal Kalecki described inflation as a product of the struggle between companies and workers. If workers manage to obtain large wage increases, their employers recover their costs by raising prices, forcing workers to look even harder, and so on in a spiral of wages and prices. On the other hand, if workers have little or no influence, as is the case in many sectors, the spiral of wages and prices never begins. Kalecki's Marxist analysis survives in modern monetary theory, a foretaste of the once marginal economics for which liberal Democratic politicians such as Senator Bernie Sanders of Vermont and Representative Alexandria Ocasio-Cortez of New York have developed.

Surprisingly, even the Federal Reserve considered the idea that inflation might be related to something like the class struggle. Richard Clarida, an economist at Columbia University, who began his four-year tenure as Vice President of the Federal Reserve in September, strongly emphasizes the decline in workers' participation in national income, which has reached 66.4%. % at the end of the year. 2018, ranging from 68% to 71% between 1970 and 2010. His implicit argument is that firms could significantly increase work without raising the prices of goods and services, as long as they were willing to return. the increase in the share of national income.

With dead or inactive inflation, central banks are beating left and right for not doing more to curb growth. Stephen Moore, elected by Trump (to date) to a vacancy on the Board of Governors of the Federal Reserve, said that "hundreds" of Federal Reserve economists have no idea and should to be dismissed. "I repeat: growth does not cause inflation," he said. Bloomberg Television April 11th. "We know that when the production of goods and services goes up, prices go down," he said. Moore 's argument is an argument on the supply side: growth increases the production capacity of the economy at least as much as demand, so that it does not. There is no upward pressure on prices.

For Lawrence Summers, an economist at Harvard, persistent inflation is a symptom of what he calls secular stagnation. As interest rates are already low, aggressive fiscal policy is a critical treatment to remedy this situation, according to Summers, Treasury Secretary to President Bill Clinton and director of President Barack Obama's National Economic Council. He is not a fan of Trump 's tax cuts, but argues that the federal government should increase public investment, even if it means getting into more debt.

Germany and other countries in Northern Europe with little debt are particularly well placed to spend more and help boost global growth, said Mohamed El-Erian, chief economic advisor of Allianz SE in Germany and columnist for Bloomberg Opinion. "Unfortunately," he wrote in an e-mail, "the political will to implement such an approach is lacking."

Which means it could last a while. In a presentation on April 15 at the Peterson Institute of International Economics, Summers said the major industrial economies would face low inflation and low interest rates "during less 10 to 15 years old ".

One of the reasons for the persistence of low inflation is that it is linked to the aging of societies. "I'd used to say it was just an excuse, but I'm starting to wonder if the Japanese are right," said Adam Posen, president of the Peterson Institute. "Maybe aging affects people's willingness to negotiate wages, change jobs, invest."

If inflation has remained low despite the decline in unemployment, it is partly because companies are finding new ways to keep wages on track. Juan Salgado, rector of the City Colleges of Chicago, a network of community colleges, says employers like Accenture and Aon are hiring graduate students for jobs they have previously held. Then they invest in training to build the skills of new hires.

According to standard macroeconomic theory, no matter how ingenuous employers are, limiting labor markets should ultimately lead to higher wages and general inflation. In an article published in April by Joseph Gagnon and Christopher Collins of the Peterson Institute, the unemployment rate is finally low enough to allow a "moderate increase in inflation over the next few years". But the authors cautiously add that there could also be little change. An article published in January by Olivier Coibion ​​of the University of Texas at Austin and Yuriy Gorodnichenko and Mauricio Ulate of the University of California at Berkeley reveals "no evidence of inflation on the brink d & # 39; increase ".

A new and growing idea is that central banks are sacrificing some of their independence and coordinating their efforts more closely with the tax, tax and spending authorities. Posen, of the Peterson Institute, told Bloomberg that if the federal government engages in major projects in areas such as clean energy or health care, it could spur the private sector to do the same. even. This could put the whole economy on the path to stronger growth, he said.

The US Federal Reserve knows that its credibility is in danger. She has launched a "Fed Listens" tour which will culminate with a research conference on June 4 and 5 at the Federal Reserve in Chicago. Topics will include monetary policy strategy, economic management tools and communication practices (Salgado is on the list of speakers). Federal Reserve officials have already made it known that despite the call for new ideas, they were not yet ready to write the obituary about the 2-year inflation goal. %.

By Piter Coy, with the collaboration of Matthew Boesler, Rich Miller and Craig Torres (Bloomberg)