IMF Survey : The Elusive Pursuit of Inflation
IMF News, April 17, 2015
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- Published: April 17, 2015
Diagnosis and prognosis
- Core inflation in Europe, Japan, and the United States is well below target levels.
- Two out of three central banks are currently expanding quantitative easing and one is signaling a slower exit.
- Demand is weak at the global level and output is well below potential in major advanced economies.
- Panelists expected Europe, Japan, and the United States to make progress over the course of this year and the next.
- United States:
- The inflation rate had been rising before the drop in energy prices had a “massive but temporary effect”, according to Stanley Fischer, Vice-Chair of the Federal Reserve Board.
- Amid signs that wages are increasing, Mr. Fischer expected the U.S. to move towards 2 percent inflation over the next couple of years.
- David Lipton, First Deputy Managing Director of the IMF:
- Noted the U.S. economy was on the upturn and said lower energy prices would have a positive effect on spending in Europe.
- Stated “The risk of a prolonged deflationary episode is diminished,” while advising caution.
- Peter Praet, member of the European Central Bank’s Executive Board:
- Agreed the output gap was closing in advanced economies but noted the opposite was happening in many emerging markets.
- Pointed to a sequence of shocks on the supply side complicating analysis.
- Takatoshi Ito, Professor at Columbia University:
- Said it takes a “big push” to escape a deflation trap.
- Highlighted Japan’s experience: raising inflation from −0.5 percent in 2013 to 1.5 percent in 2014 was a “significant achievement”; inflation has since slipped back to zero.
- Attributed the recent slip mainly to the fall in energy prices rather than a failure of monetary policy.
Monetary policy working, more action needed
- Panelists spoke positively of the effects of unconventional monetary policy: quantitative easing and accompanying measures.
- None saw current policies as presenting a significant risk to financial stability.
- Macro-prudential policies were identified as a more precise tool to address financial risks, should they arise.
- Panel consensus: strong measures by central banks are fully justified by economic conditions.
- Peter Praet emphasized the ECB’s commitment to pursue quantitative easing at least until September 2016.
- David Lipton noted the vital role of commitment in anchoring expectations: “to do whatever it takes, for as long as it takes”, as he put it.
- Limits of monetary policy:
- Central banks are appropriately focused on fulfilling their price stability mandate.
- Governments should take supporting actions, including:
- Investing in infrastructure to enhance productivity.
- Facilitating balance sheet repair by banks, firms and households.
2 percent or not 2 percent: that is the question
- The United States, euro area, and Japan are all aiming towards inflation approaching 2 percent.
- Some economists have argued for a significantly higher target (for example around 4 percent), but none of the panelists shared that view.
- Panelists recommended focusing on the already challenging task of reaching 2 percent.
Spillovers to emerging economies
- Takatoshi Ito: dealing with spillovers from macroeconomic policies in advanced economies is nothing new for emerging economies.
- Unusual recent feature: spillovers are perceived to arise almost exclusively from currency movements.
- Quantitative easing can drive capital inflows to emerging economies, while exit from such policies can reverse flows.
- Emerging markets need to:
- Build more robust economies.
- Deploy “creative policies” to withstand exchange rate fluctuations.
- Stanley Fischer:
- Emphasized the Fed’s scrupulous signaling of likely future interest rate actions so other countries have ample time to prepare.
- Noted such actions would be incremental: “We are not talking about going from light to darkness.”
- Agreed with Mr. Ito that spillovers to other countries could be mitigated by smart policies.
Source: IMF Survey : The Elusive Pursuit of Inflation, April 17, 2015, IMF Survey (Christopher Coakley).