When inflation started to spike in 2021, many policymakers and economists dismissed the problem as transient. According to "Team Transitory", central banks did not need to slow economic activity by raising interest rates aggressively because price pressures would soon subside as Covid19 disruptions dissipated. Others disagreed. Excessive government fiscal stimulus and central bank bondbuying programmes risked permanently raising inflation, they said.
According to "Team Permanent", central banks needed to raise rates sharply.
The rift between those who said inflation was transient and those who thought it permanent partly reflected differences over what caused prices to rise in the first place. One explanation stressed that inflation rose at the same time in most countries because they were subjected-to varying degrees― to a similar sequence of shocks: The Covid-19 pandemic, mobility restrictions, and the associated set of economic policy measures, especially the extent of fiscal and monetary support. More fiscal and monetary support, tighter labour markets or less-well anchored inflation expectations could translate into persistently higher inflation, which, as "Team Permanent" argued, would necessitate restrictive monetary policy to curb demand.
Denne historien er fra August 23, 2024-utgaven av Business Standard.
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