Lecture, Statement
Inflation: could covid-19 cause prices to rise?
- Central banks may have limited power to control inflation or revive it from low levels, potentially resulting in persistent price stagnation.
- Most central banks target an inflation rate around 2%, yet rising interest rates intended to lower inflation could also slow economic activity.
- Low inflation combined with high volatility creates planning difficulties for businesses and individuals, while unexpected high inflation can complicate borrowing and lending.
- Sustained high inflation risks causing a breakdown in long-term borrowing for affected countries.
- In a strong economy with low unemployment and rising wages, firms may confidently increase prices; conversely, in a weak economy with high unemployment, wage growth may stall and price hikes become difficult.
- Long-term low inflation may have altered expectations, causing firms and workers to hesitate on price and wage increases even during labor market booms, particularly if they anticipate others will not follow suit.
- Wage rigidity observed during the financial crisis, where firms avoided significant cuts, may similarly limit wage rises during recovery periods.
- Pay and inflation are expected to rise eventually, but the process will likely take time, though pandemic disruptions could potentially accelerate the return to target levels.
- Coordinated government borrowing and spending, supported by central banks preventing upward interest rate pressure, could stimulate the economy and repair the global economy.
- Cooperation between central banks and governments is identified as a viable mechanism to lift inflation from its current floor.