Global economies will be “sitting on a time bomb” if inflation rises faster than expected, which could plunge several countries into recessions and see society’s most vulnerable hit hardest, a global bank has warned.
“We worry that inflation will make a comeback,” the economists said.
“We believe price growth will regain significant momentum as the economy overheats in 2022. Yet we worry that … the [US Federal Reserve] will be too slow to damp the rising inflation pressures effectively.
“Neglecting inflation leaves global economies sitting on a time bomb.”
The US Federal Reserve has said it views inflation pressures as temporary, and is showing all the signs that it is unwilling to raise interest rates, a key lever used to control rising inflation.
But Deutsche Bank economists warned that this reactive approach will make the US Fed “too late to deal effectively with an inflation problem” and cause massive disruptions to countries around the world.
“History is not on the side of the Fed. In recent memory, the central bank has not succeeded in achieving a soft landing when implementing monetary tightening.”
“Monetary policy operates with long and variable lags, and as we have noted, it will also take time to recognise that inflation has actually overshot excessively and persistently.”
Central banks from other countries take their cues from the US, and acting too late would be devastating, the economists said.
“In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets.”
As the global economy enters a new paradigm, much of which has been accepted as conventional financial and macro-economics needs to be questioned, Deutsche Bank argued.
There is a new economic perspective emerging that places a higher priority on broader social and long-term goals, such as tackling climate change and redistributing social and economic power as wealth inequality comes to the fore, the economists said.
“Policymakers are about to enter a far more difficult world than they have seen for several decades.”
Inflation concerns have been escalating recently
The Deutsche Bank economists are the latest voice amid a rising swell of commentators concerned about the consequences of runaway inflation.
Most notably, the US is seeing unprecedented levels of cash being injected into the economy thanks to US President Joe Biden’s US$6 trillion in stimulus.
Commodity prices have also been on the rise – the price of copper alone has risen by 93 per cent since the 1 June last year – which in turn pushes up the cost of goods.
Meanwhile, the broader global economy is getting back on track as more people around the world receive COVID vaccines, with an upturn in the global economy driving higher demand and inflation along with it.
There are also longer-term forces at play, according to AMP Capital chief economist Shane Oliver, who said the trend of low inflation over the last 40 years appears to be coming to an end.
Rising inflation is a significant concern for investors, who have been spooked away from tech stocks and property – which are attractive in low interest rate environments – and gravitating towards safer investments, like bonds.
An uncertain world
Investors and economists alike are ill-equipped to deal with the sudden shift in the economic paradigm, which has revolved around low interest rates for decades.
Spiking inflation, if it isn’t contained, could be the undoing of still-recovering economies grappling with the aftereffects of the COVID-triggered recession.
“Economic forecasting, which is difficult at the best of times, is becoming harder by the day. Fractured politics amplifies the problem,” the Deutsche Bank economists said.
“When central banks are eventually forced to act on inflation, they will find it themselves in a difficult, if not untenable, position.
Increasing prices will affect everybody, they added.
“The effects could be devastating, particularly for the most vulnerable in society.
“Sadly, when central banks do act at this stage, they will be forced into abrupt policy change which will only make it harder for policymakers to achieve the social goals that our societies need.”