Fight inflation by creating new ideas
When central bankers coalesce at an economic crossroads, words sometimes speak louder than deeds. The US Federal Reserve raised interest rates by a quarter of a percentage point yesterday for the first time since the start of the pandemic to fight inflation. The Bank of England made a similar adjustment today, its third in recent months. The European Central Bank, meanwhile, says it will gradually buy fewer bonds. For economists who want bolder efforts to rein in soaring prices, it’s been a disappointing week.
But perhaps more important than the numbers is the recognition that, as the Fed put it, their “economic forecasts are necessarily imperfect descriptions of the real world.” In other words, amid the uncertainties of the pandemic and the war in Ukraine, central banks are running out of silver bullets.
This transparency matters. It can bolster weakened public confidence in the institutions that ensure economic stability. More importantly, it can help break the “inflationary mindset” or “inflation psychology” by inspiring businesses and individuals to seek solutions through innovation and personal action.
“Not many people talk about the role innovation could play in this economic cycle,” observed eToro investment analyst Callie Cox in a 2021 blog post. and interact with each other. And this collective overhaul has led to a renaissance of sorts — an era that could potentially lead to productivity gains for American businesses and a further boost for the economy and markets.
Inflation in the United States, at 7.9%, is at its highest rate since 1982. A Quinnipiac University survey revealed last month that 27% of respondents considered inflation to be the biggest problem. country’s most pressing issue, while 59% said the economy was deteriorating. In Britain, where inflation is at 5.5%, its highest level in 30 years, a quarterly survey by the Bank of England revealed last week that the public’s outlook on inflation and wages are more pessimistic than at any time since 2008.
The public’s perception of inflation can have a spiraling effect. When prices rise sharply, as they are now, consumers may start spending faster to avoid even higher costs. It hasn’t happened yet. But as inflation persists, the risk grows that the public will focus more on the short-term consequences. The result is that inflation can become self-perpetuating.
Prices at the pump and at grocery store checkouts, however, may mask more optimistic indicators. Productivity has increased by an average of 2.3% per year since 2018. According to the Bureau of Labor Statistics, productivity increased by 6.6% in the last quarter of 2021. Wages increased by 2% per year in the two last years. These figures illustrate the opposite of what happened during the 1970s, when productivity fell sharply and wages stagnated.
This reflects vigorous efforts by businesses to become more efficient, such as in the growth of online car sales and the estimated tens of billions of dollars saved as more people work from home. Such shifts in the way businesses operate and people work “give reason to believe that the uptick in productivity growth over the past three years may continue,” wrote Dean Baker, senior economist at the Center for Economic and Policy Research, last week.
Fed Chairman Jerome Powell describes his approach to inflation as “humble and nimble.” As central banks adjust their policy knobs to restore a fair balance between prices, wages and growth, these qualities have a lesson. Stability begins on the supply side of ideas, which everyone can access.
Become a member of the Monitor community