Monetary policy alone cannot deliver growth and prosperity. Any brighter economic future needs input from policymakers and governments
Inflation is lower, yet not low enough in some places. The cost of services and take-home pay are both lagging pre-pandemic trends and a rapid catch-up could see renewed upward pressure on inflation.Central banks have shown they can take forceful action to head off the most dramatic increase in inflation in a generation. They took steps to protect the purchasing power of people and firms. Although the last mile to return to price stability is not yet complete, the end is well in sight.
To be sure, circumstances helped. Recovering trade logistics and falling commodity prices supported disinflation. However, we saw in the 1970s how a burst of inflation, if not countered, can trigger a shift to a high-inflation mindset.Untrustworthy companies love to talk about trust The post-pandemic inflation spike was only the latest in a series of tests for central bank policies. In our latest annual economic report, we at the Bank for International Settlements look at the tumultuous period since the turn of this century, including major financial crises and the unprecedented experiment in turning the global economy on and off again due to the pandemic.
However, we’ve also learned that monetary policy cannot fine-tune inflation. It is vital that central banks act when inflation overshoots. But such measures are less warranted, and may even be counterproductive, when inflation sits a few fractions of a per cent below central bank targets. Inflation targets should be a guide, not an obsession.
Policies work better as part of a coherent whole. Even now, with central banks still trying to ensure inflation stays under control, we see that around the world, budget giveaways brought in during the pandemic are at risk of acting at cross-purposes by stimulating the economy and stoking inflation. In the long run, structural reforms are key to sustainably lift the standard of living, improve economic wellbeing and give people a sense of security. This means taking lasting measures such as promoting competition, enhancing flexibility and spurring innovation. Scarce public funds should support the economy’s adjustment to new realities such as climate and technological change, including the artificial intelligence revolution. Only a solid foundation allows us to build for the future.
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