Thaw substance and meat of this post is taken from arguments and data that were published this morning - very early the day after Fed Reserve President Jay Powell made an announcement on longer-term objectives of a change in the central bank's monetary policy.
Here's the link > WaPo 08.28.2020Connect the dots if you can. Right now the jury is out
"There’s hardly any question that carries greater weight in economics right now, or divides the financial world more sharply, than whether inflation is on the way back.
One camp is convinced that the no-expense-spared fight against Covid-19 has put developed economies on course for rising prices on a scale they haven’t seen in decades.
The other one says the virus is exacerbating the conditions of the past dozen years or so -- when deflation, rather than overheating, has been the big threat.
A decision by the U.S. Federal Reserve to allow inflation to run higher during economic recoveries is raising the stakes in the debate.
What’s the evidence on inflation?
For now the jury is out. Some countries reported a drop in prices early in the crisis, and a jump more recently. In the bond markets and among consumers, measures of expected inflation have edged higher. But the data that will ultimately settle the question could take years to trickle in. In the meantime, investors and the public are left to weigh the arguments. Here are some of the main ones...
Case for Inflation: Loose Central Banks
One reason why many analysts expect higher inflation is simply because central banks, the guardians of price stability in the low-inflation era, are more willing than ever to let it rise, a trend emphasized by the Fed’s announcement of its new strategy...
Case Against: Loose Labor Markets
Policy makers have worked with a rule of thumb that assumes some kind of trade-off between inflation and unemployment, known as the Phillips Curve. The idea is that prices will only face sustained upward pressure when the economy is using all its resources –- including labor. Doubt has been cast on the strength of that link. Still, if there’s any connection at all, then it should ease concerns about inflation. Employment everywhere has slumped, with little prospect of a quick rebound to pre-pandemic levels.
Case Against: Money Velocity
It’s the use of money, not just its creation, that affects prices. That’s one explanation for subdued inflation since 2008, even as central banks cranked up the printing presses. And the same forces may still be at work. In the U.S. the “velocity” of money -– the frequency with which it changes hands, as people use it to buy goods and services -– fell off in the 2008 financial crisis, never really recovered, and has collapsed to unprecedented lows now.
Spending may bounce back faster than it did after 2008, and drive prices higher, because a more aggressive policy response has cushioned the blow to household finances...
Case Against: Household Fear
Incomes may have held up through the recession, thanks to government intervention, but not all the money is getting spent.
Case for Inflation: Supply Shocks
There’s already evidence that disruptions to supply chains are pushing prices up. In China, for example, food inflation has been accelerating in the last couple of months, and a squeeze on imports because of the pandemic is one reason why.
The long-run risk is that the virus will escalate tensions like the ones behind the U.S.-China trade war.
> Governments may become more reluctant to rely on other countries for strategic goods, such as masks and medicine or computer chips.
> They could pressure business to bring manufacturing home, even when it’s more expensive. “Trade, tech and titans” -- cheap imports, technological advances and corporate giants with the market power to suppress wages -- have been “the driving forces behind the disinflationary trends over the last 30 years,” Morgan Stanley economists wrote. But the same trio also gets blamed for widening inequality, and faces growing political scrutiny that “could create a regime shift in inflation dynamics.”
Case Against: Spare Capacity
The fight against Covid-19 has often been compared with an actual war, the kind of disaster that historically has triggered inflation. But there’s an important difference.
Military conflicts wreck the supply side of the economy, like factories and railway lines, leading to bottlenecks and shortages that push prices up. The coronavirus has left those facilities intact -- even if they’re not being used right now. In a pandemic, it’s demand that takes the main hit, says Alicia Garcia Herrero, chief Asia Pacific economist with Natixis SA. “Capital is not destroyed or depleted, so it is much easier to end up with excess capacity,” she says. That distinction is one reason she’s “in the deflation camp.”
__________________________________________________________________________________
THE SOURCE:
For more articles like this, please visit us at bloomberg.com
How the Fed Is Bringing an Inflation Debate to a Boil
