INTHEBLACK November 2021 - Magazine - Page 18
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// T I M E S T H R E E
COMPILED BY SUSAN MULDOWNEY
01
SU-LIN ONG
CHIEF ECONOMIST AND MANAGING DIRECTOR,
R B C C A P I TA L M A R K E T S
HIGH EXPECTATIONS
The International Monetary Fund has recently warned that
inflation may be settling in for the long term and encouraged
central banks to take pre-emptive action. Will ultra-low
interest rates and the free flow of money trigger the return
of high inflation?
Global prices are increasing quickly, with
country-weighted Consumer Price Index
accelerating in 2021 and running above
4 per cent year on year, while inflation
expectations are rising.
The combination of strong demand as
COVID-19 restrictions continue to ease
worldwide and supply struggling to keep up,
exacerbated by supply chain disruptions,
is underpinning a lift in inflation.
Policy settings are fuelling these dynamics.
While the global fiscal impulse is past its peak,
it was historically large, and monetary settings
remain ultra-easy, with liquidity continuing to
be added. In addition, changes to key policy
frameworks by the US Federal Reserve and
European Central Bank hint at a desire for
higher inflation.
A long period of ultra-low rates drives a
misallocation of capital. Fuelling asset prices,
it forces riskier investment behaviour and
encourages more debt, but is the alternative
of deeper recession and higher unemployment
any better?
Inflation will remain elevated for some months,
but we think it is unlikely to be sustained at the
current pace. Base effect will wane, supply chains
are being restored and pent-up demand will be
satiated.
There is also only so much catch-up in services
that can occur. If inflation continues to surprise to
the upside and becomes more embedded and
broad-based, central banks know what to do and
can move quickly.
_
Inflation will remain elevated for some months,
but we think it is unlikely to be sustained at the
current pace...If inflation continues to surprise to
the upside and becomes more embedded and
broad-based, central banks know what to do
and can move quickly.
18 ITB November 2021