Economy: Only 57.6% of Inflation Cases Resolved Within 5 Years, Emphasizes Need for Consistent Fiscal Tightening Policy
A recent survey has revealed that historically, less than 60% of inflation cases have seen a resolution within a five-year period. Surprisingly, premature monetary policy easing has often led to a failure in tackling inflation. This challenges market expectations of a slowdown in inflation, as soaring US Treasury bond yields continue to support the claim of its continued rise.
According to a report published on the International Monetary Fund (IMF) website, economists, including Anil Ari, analyzed 111 cases of inflation that occurred in 56 countries from 1970 to the present day. Disappointingly, only 64 cases (57.6%) were successfully resolved within five years, with some cases taking even longer to resolve. Shockingly, only 10% of cases showed an economy bouncing back to pre-crisis levels within a year after the inflationary shock. Most monetary policy failures were a result of premature celebration, as inflation rates would initially fall significantly within the first three years, only to plateau at high levels or accelerate again.
The United States’ experience in 1973 serves as a representative example. As prices skyrocketed due to the first oil shock, the US Central Bank (Fed) raised the base interest rate to 11% per annum. However, as the second oil shock hit in the late 1970s, the inflation rate rose to a staggering 13% in 1979.
Consistent monetary policy implemented by central banks is crucial. The report emphasizes the importance of tight monetary policies, as countries that successfully resolved inflation demonstrated continued implementation over time. These countries also exhibited proper control of nominal exchange rates and wage growth rates, alongside experiencing moderately low growth within five years.
In the case of Britain in 1979 and Italy in 1980, both countries successfully conquered inflation. When faced with the second oil shock, inflation in the UK increased from 5% to 15%. Responding to this, the Bank of England raised the real interest rate from -5% to 7% per annum between 1980 and 1984. Similarly, Italy witnessed a rise in real interest rates from -5% to 6% per annum during a similar period. The report suggests that strengthening central bank independence may have played a role in controlling inflation after the second oil shock.
These findings dampen expectations of easing austerity measures. Despite market speculation that the last increase in the Fed’s benchmark interest rate hinted at a shift in monetary policy, recent comments by Federal Chairman Jerome Powell and other officials have dismissed this notion. The Fed is determined not to repeat the mistakes of the past, where hasty easing resulted in even more severe inflation. With a CPI increase rate of 3.7% last month, the Fed has sent a hawkish message, signaling its intention to maintain higher benchmark interest rates for an extended period.
Unsurprisingly, US Treasury yields have reached record highs, signaling growing concerns about inflation. It’s evident that signs of easing inflation should not lead to complacency and relaxation of tight monetary policies.
By Park Reporter Shin-young
nyusos@hankyung.com
economy
Entered 2023.10.03 15:06 Modified 2023.10.03 15:39
Of the 111 inflation cases worldwide, only 57.6% were resolved within 5 years.
If monetary policy is eased before inflation is detected, the probability of failure is high.
A consistent fiscal tightening policy is needed
Photo = REUTERS Although the world’s attention is focused on the timing of the US central bank’s (Fed) interest rate cut, a survey showed that less than 60% of cases have historically seen inflation fall within five years. In particular, there were many cases where premature firing over the time to resolve inflation actually accelerated the rate of inflation again. Contrary to Wall Street’s expectations of a slowdown in inflation, some say it continues to soar and US Treasury bond yields support this claim.
Only 64 out of 111 inflation cases were resolved within 5 years.
According to the International Monetary Fund (IMF) website on the 3rd, researchers including economist Anil Ari published a report entitled ‘100 Inflation Shocks and 7 Stereotypical Facts.’ The report analyzed seven characteristics related to inflation.
Firstly, as a result of analyzing 111 cases of inflation that occurred in 56 countries from 1970 to the present day, only 64 cases (57.6%) were resolved within 5 years. This took even more than three years to resolve inflation. Only 10% (12 cases) of cases showed that the economy recovered to pre-crisis levels within a year after the inflationary shock. Of these, seven were in the midst of a financial crisis, such as Korea in 1998. Monetary policy failures linked to inflation have largely involved popping the champagne too early. “In about 90% of unresolved inflation cases, inflation rates fell significantly within the first three years after the initial shock of inflation, but then leveled off at high levels or accelerated again,” the report said.
The case of the United States in 1973 is a representative example. The US Central Bank (Fed) raised the base interest rate to a maximum of 11% per annum in the early 1970s as prices soared due to the first oil shock, but immediately began to lower the base interest rate as the rate of inflation is slowing down. However, as the second oil shock occurred in the late 1970s, the inflation rate rose to 13% in 1979.
A consistent monetary policy is important
The report repeatedly emphasized the importance of consistent monetary policy by central banks. He pointed out that the commonality of countries that have resolved inflation is that they have continued to implement tight monetary policies over time. Countries that have resolved inflation have also demonstrated appropriate control of nominal exchange rates and nominal wage growth rates through tight monetary policies. The characteristic of experiencing moderately low growth in a short period within 5 years also emerged.
Britain in 1979 and Italy in 1980 were identified as examples of succeeding in overcoming inflation. In the UK, inflation increased from 5% to 15% due to the second oil shock. Accordingly, the Bank of England raised the real interest rate from -5% per annum to 7% per annum between 1980 and 1984. During this period, when Prime Minister Margaret Thatcher was elected in 1979 and promised to control inflation, the oil shock the economy and the growth rate of gross domestic product (GDP) initially plunged, but later fell to 3-5%, the growth rate before the shock, in the mid-1980s % recovery. In Italy, the real interest rate also rose from -5% per annum to 6% per annum over a similar period. The report analyzed, “Strengthening central bank independence may also have played a role in controlling inflation after the second oil shock.”
Cold water on expectations of easing austerity measures
At one point, there was speculation in the market that when the Fed raised its benchmark interest rate by 0.25 percentage points in July, this was actually the last increase. As the rate of increase in the consumer price index (CPI) slowed, expectations for a pivot (monetary policy change) also increased.
However, recent comments by Federal Chairman Jerome Powell and other Federal Reserve officials suggesting the possibility of additional tightening have poured cold water on the market’s hopeful outlook. As seen in the IMF report, the Fed is showing a strong will not to reverse cases in the past where hasty easing led to more severe inflation. With a CPI increase rate of 3.7% last month, the Fed also issued a hawkish message (favoring monetary tightening) that it would maintain the benchmark interest rate ‘higher for longer’ after the Federal Open Market Committee (FOMC) in September Because.
Accordingly, US Treasury yields are also reaching record highs. In the New York bond market on the 2nd (local time), the interest rate on 10-year US Treasury bonds was more than 4.7% during the day, the highest since October 2007. The IMF said, “We should not relax the intensity tightening only because there are signs of easing inflation.”
New York = Park Reporter Shin-young nyusos@hankyung.com
#inflation #controlled #years #60.. #IMF #warning
