The specter of inflation

After covid-19, the trade war, interest rates, the Chinese economy and Brexit, at the time, inflation is the new ghost that scares Wall Street and has global financial markets on edge.

Domesticated by globalization, central banks, demographics and the deflationary impact of technology, inflation has not been late in developed countries since the 1970s and early 1980s, when it topped 20% in the UK and Japan and reached two digits in the US, due to the increase in oil prices.

Paul Volcker, then Chairman of the Federal Reserve raised interest rates to 20% and his victory over inflation ushered in the Great Moderation, a period of low unemployment and the longest economic expansion from World War II to the Great Recession. (2008-2009).

In fact, some gave her up for dead and the less optimistic said she had entered a kind of hibernation, the end of which would be near by the US $ 1.9 trillion tax package approved by the North American Congress and a post-pandemic economic boom. Result? An increase in inflationary expectations, as reflected by the rise in the rates of the 10-year Treasury bonds to 1.7%, which has already hit Colombian debt, and the surveys among portfolio managers.

Ray Dalio, who before the pandemic called cash junk, says that investing in bonds is stupid, since the returns on fixed income are ridiculously low, which is the equivalent of losing money when discounting inflation. Bill Gross, the ‘king of bonds’, has also taken a position against the Treasuries and said that the fiscal package will increase inflation to 3-4% in the medium term and will force the Fed to review its docile stance.

Are the fears exaggerated considering that the annual variation of the CPI in February was 1.7%? The debate has generated differences between heavyweights. Lawrence Summers, who once said that moderate inflation acted as a “social lubricant,” called current macroeconomic policy the “least responsible” in four decades and pointed to the risk of stagflation, which would force the Fed to slow the economy. .
Paul Krugman rejected that hypothesis. He said that inflation alarms are exaggerated and pointed out that the US $ 1,400 that each North American will receive will be saved instead of spent.

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Kenneth Rogoff explained that, although there are risks in the long term, a sudden burst of inflation is unlikely, because rising prices in developed economies is a slow variable, as years of ultra-low inflation are ingrained in the psyche of businesses and consumers.

Less ambiguous than some of his predecessors, perhaps because he is not an economist, Fed Chairman Jerome Powell has said he is not scared by the specter of inflation. In one of his last appearances, he reiterated the goal of taking it slightly above 2%, on average, and said there will be no rate hikes until at least 2023.

Despite this, the debate is open and the avalanche of dollars from the Fed and public spending will continue to give people talk and generate headlines like the one in this column.

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