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What if global inflation surprises on the upside?

Manu Bhaskaran
Manu Bhaskaran7/31/2017 08:00 AM GMT+08  • 9 min read
What if global inflation surprises on the upside?
(July 31): Inflation, or more precisely the lack of it, has become a major point of contention for monetary policy makers and those seeking to understand where asset markets are heading. In general, this year has seen lower-than-expected inflation in deve
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(July 31): Inflation, or more precisely the lack of it, has become a major point of contention for monetary policy makers and those seeking to understand where asset markets are heading. In general, this year has seen lower-than-expected inflation in developed economies. As a result, central banks in the US and Europe face a conundrum: Their economies have recovered from the ravages of the global financial crisis and subsequent aftershocks, such as the eurozone sovereign debt crises, but inflation data is not signalling a need to raise interest rates.

In the US particularly, where unemployment is low and average growth has been in line with the economy’s potential, there is little reason for the ultra-low policy rates and quantitative easing that were appropriate for a time of extreme crisis. In other words, central banks really should be raising interest rates and reducing the size of their balance sheets. But, the absence of inflationary pressures has deterred them because some policymakers fear the low inflation could reflect underlying weaknesses in the economy and financial system.

Consequently, it has become important to understand what is happening to inflation. Is low inflation really a danger and will it persist? Is this phenomenon shaped by forces that are benign or potentially damaging? Our view is positive: Low inflation is by and large a good thing and it should not be a reason to delay the normalisation of monetary policy.

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