Inflation Has More Than One Reason to Surge, Only It Won'tBy
Past wage-price spiral less likely amid recent labor dynamics
Central banks face dilemma in pace of policy normalization
Age-old inflation patterns might be in the process of breaking with history.
Labor markets are improving and unused resources are diminishing globally -- a phenomenon the Bank for International Settlements says shouldn’t be underestimated. Only the link between slack and price formation has proved rather elusive for quite some time, the Basel-based bank wrote in its annual report.
The central bank of central banks is the latest in a string of major economic institutions to argue that globalization, technological change and structural settings are crimping workers’ clout in bargaining and the pricing power of firms, making the wage-price spirals of the past less likely.
“Global labor markets have seen profound changes over the past decades, with significant implications for wage and price formation,” the BIS said. “The question for many central banks is whether these developments have so weakened the relationship between inflation and labor-market slack that the recent tightening of labor markets poses little threat of an inflation overshoot.”
The BIS’s judgment is that while an inflation spurt can’t be excluded, it may not -- unlike in the past when central banks were prone to precipitating recessions with resolute tightening in response to surging prices -- be the main factor threatening the recovery. The bigger risk is a financial-cycle bust.
And that’s what creates a dilemma for policy makers as they stave off a more aggressive pace in unwinding unprecedented stimulus to continue to support the economy and allow price growth to catch up.
“Even if inflation does not rise, keeping interest rates too low for long could raise financial stability and macroeconomic risks further down the road, as debt continues to pile up and risk-taking in financial markets gathers steam,” the BIS said. “How policy makers address these trade-offs will be critical for the prospects of a sustainable expansion.”