Inflation is temporary and we should celebrate it, central bank group BIS says

A crowded bar in Paris’ 6th Arrondissement as Parisians embrace the lifting of Covid-19 restrictions as cafes and restaurants across France re-open for the first time in over 6 months.

Kiran Ridley | Getty Images News | Getty Images

LONDON — The recent surge in prices is temporary and should be celebrated, Claudio Borio, head of the economic and monetary department at the Bank for International Settlements, has told CNBC.

“For those countries … that have been trying very, very hard to get inflation up unsuccessfully, having inflation persistently higher roughly at target, that would actually be very good news and one should rejoice about that,” Borio told CNBC’s Julianna Tatelbaum.

It comes after inflation readings have beaten expectations in both the U.S. and Europe over recent months – and it’s divided monetary policymakers.

Some European officials believe the region’s pandemic-induced stimulus program should be scaled back in the face of rising prices, while others argue that inflation will be temporary and so monetary policy should remain loose. Inflation can be a tricky economic indicator: if it is too high, it erases the purchasing power of consumers; if it is too low, it can reduce economic growth. 

“The real problem is if inflation proves to be higher, uncomfortably higher for uncomfortably long,” Borio said. However he stressed that BIS — which aims to foster coordination among central banks — expects the increase in inflation to be “transitory.”

Until recently in the euro zone, inflation has been persistently low in the wake of the global financial crisis and the region’s sovereign debt crises. But prices have experienced a massive increase in recent weeks.

Annual Inflation in the euro zone rose to 2% in the month of May, slightly above the ECB’s target of “below, but close to, 2%.” This has been linked to the easing of various social-distancing rules across the 19 euro nations and consumers’ willingness to spend more.

However, ECB President Christine Lagarde has insisted that the uptick in inflation is temporary, and that it will fall back below the target in the foreseeable future.

“Inflation has picked up over recent months, largely on account of base effects, transitory factors and an increase in energy prices. It is expected to rise further in the second half of the year, before declining as temporary factors fade out,” she said at a press conference earlier this month.

Speaking to CNBC, Borio agreed that “so far, most [of] what is going on is essentially temporary.”

“We have one-off increases in prices which are basically bouncing back from where they were before; we’re having technical effects, so-called base effects; we’re seeing, indeed, there are speed limits to [the] world economy,” he added.

The latest ECB forecasts point to a headline inflation of 1.9% at the end of 2021, followed by a decrease to 1.5% and 1.4% in 2022 and 2023 respectively.

In the BIS latest annual report, released Tuesday, the institution said that “normalising policy will not be easy” for central banks.

This subject has already sparked some divisions within the ECB, with hawkish member Jens Weidmann pushing for the coronavirus-stimulus program to be lifted step-by-step. Whereas other ECB members are worried about a premature scaling back of the program.




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