The Inflation Fight Could Easily Go Too Far

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Most central banks of consequence made clear in the lead-up to the pandemic that inflation was too low. The Fed and ECB undertook high-profile reviews and adopted important changes in how they set the price of money. The Fed moved to an average inflation target, while the ECB said it could live with a bit-above-target price increases, at least temporarily. Transitions like this come along once in a decade, if that. To effectively renounce these shifts so soon wouldn’t make inflation disappear overnight and would throw into question any future commitments.  Monetary authorities that have moved quickly to tamp down inflation haven’t had an easy time. Poland  flubbed communications to the point that economists at one top lender said they would effectively stop listening to what its monetary officials were saying. In Brazil, the central bank sounds determined to crush inflation, almost certainly at the cost of a deep economic slump and the potential enmity of a strongman president running for reelection. The Reserve Bank of New Zealand, enthusiastic about withdrawing stimulus, warned of decades of elevated inflation because of shocks from ruptured supply chains. “We’ve all talked about them, we all knew they were coming, we all said they may be temporary,” RBNZ Governor Adrian Orr said Tuesday. “Now the general discussion is wow, these are persistent. Imagine that continuing now for the next 20-plus years. That is the world that we will be living in.” Is New Zealand prepared to live with high interest rates until mid-century? I’m skeptical. 

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