A customer purchases meat at a Costco store on May 24, 2021 in Novato, Calif.
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Inflation may seem like a lost problem. But it is likely to persist and lead to a crisis in the next few years. As warned by Deutsche Bank economists
In forecasts that are beyond the consensus of policymakers and Wall Street, Deutsche has issued a grim warning that focusing on stimulus while ignoring inflation fears would prove to be a mistake if Not in the near term from 2023 onwards.
The analysis clearly points to the Federal Reserve and a new framework that will allow inflation to rise for the sake of a full and comprehensive recovery. The firm insisted that the Fed̵7;s intention not to tighten its policy until inflation showed continued increases would have serious consequences.
David Folkerts-Landau Deutsche’s chief economist and others wrote that the consequences of the delay would halt economic and financial activities more than anything else. “On the other hand This could trigger a major recession and cause global financial distress. especially in emerging markets.”
in approaching inflation The Fed will not raise interest rates or cut its asset purchase program until it sees it. “Great progress” towards the overarching goal Several central bank officials said they were not close to those objectives.
In the meantime, the consumer price index and personal consumption expenditures are above the Fed’s 2 percent inflation target, policymakers say the current rise in inflation is temporary. and will be mitigated when supply disruptions and the fundamental impact from the beginning of the pandemic crisis are eliminated.
Deutsche’s team disagreed, saying that aggressive stimulus and fundamental economic changes would bring inflation before the Fed wasn’t prepared.
“It may take another year until 2023, but inflation will return. And while this is admirable
Tolerance stems from the Fed’s focus on social goals. Ignoring inflation puts the global economy at risk of death,” Folkerts-Landau said. “The impact can be devastating, especially for the most vulnerable groups in society.”
Most on the streets saw tame inflation.
To be sure, Deutsche’s position was not widely held by economists.
Most on Wall Street agree with the Fed’s view that current inflation pressures are temporary. And they suspect there will be any policy changes anytime soon.
Goldman Sachs chief economist Jan Hatzius said there were “strong reasons” to support the position. One of the things he mentioned was the possibility that the rising unemployment benefits expiring would send workers back to work in the coming months. alleviate pressure on wages
Regarding price pressures in general, Hatzius said the current sharp rise was driven by The “unprecedented role of outliers” will decrease and bring levels back to normal.
“All of this shows that Fed officials can only stick to a plan to gradually step away from the current policy standpoint,” Hatsius wrote.
That would be a mistake from Deutsche’s point of view.
So far, Congress has approved more than $5 trillion in pandemic-related economic stimulus. And the Fed has nearly doubled its balance sheet through monthly asset purchases to just $8 trillion. The stimulus measures continued. Although the economy is expected to grow at about 10% in the second quarter and the employment picture adds 478,000 jobs per month on average in 2021.
Folkers-Landau said: “We have never seen a coordinated extended monetary and monetary policy before. This will continue when output is moving above its potential.” “This is the reason why this time is different from inflation.”
Deutsche’s team said the upcoming inflation could be similar to what it experienced in the 1970s, when the average inflation rate was nearly 7% and was double-digit over several periods. Soaring food and energy prices along with the end of price controls helped drive inflation soaring in the era.
Paul Volcker, then-Fed chairman, led the effort to squash inflation at the time. But a dramatic rate hike was needed that triggered a recession. The Deutsche team is worried that the situation will return.
“Then many sources of higher prices are filtering into the US economy. Even if these are just temporary papers. But it might come into the same expectations as they did in the 1970s,” they said. Even if they are only buried for a few months, they may be difficult to control. especially with very high stimuli.”
The company said the rate hike could “Causing havoc in a world of insolvency” with financial crises, especially in emerging economies, where growth will not be able to overcome rising financial costs.
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