By Balazs Koranyi
FRANKFURT (Reuters) – Yes, inflation is back, and you should probably be relieved, if not downright happy.
That’s the verdict of the world’s leading central banks, who hope they’ve reached the sweet spot, where healthy economies see prices rising smoothly — but without an out-of-control spiral.
Backed by vast government spending, central bankers unleashed monetary firepower unprecedented in recent years to achieve this result. In fact, less than that would suggest that the greatest central banking experiment of the modern era has failed.
Only Japan, which has been trying unsuccessfully to warm up prices since the 1990s, remains in the stagnation of inflation.
For other advanced economies, the increase in price pressures leaves the objective of reducing expansionary monetary policy in sight and finally raises the prospect that central banks — placed in the spotlight during the global financial crisis — may finally stay beside.
The current rise in inflation is not without its risks, of course, but comparisons with the stagflation of the 1970s — a period of high inflation and unemployment combined with little or no growth — seem unfounded.
At first glance, current inflation rates do look worrisome. Price growth is already above 5% in the United States and could soon reach 4% in the eurozone, well above targets and at levels not seen for more than a decade.
But the hard evidence has yet to challenge the narrative of many policymakers that this is, on the whole, a temporary jump caused by the unstable post-pandemic reopening of the economy.
“The current inflationary spike can be compared to a sneeze: the economy’s reaction to the dust that is being raised in the wake of the pandemic and the recovery that followed,” said Isabel Schnabel, board member of the European Central Bank.
So if post-sneeze inflation settles at higher levels, central banks should be happy, as they have spent most of the last decade trying to increase, not contain, inflation.
“If inflation doesn’t go up now, it will never go up,” said a central bank official who asked not to be named. “These are the perfect conditions, that’s what we’re working for.”
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