After 10 years of being largely absent, inflation has returned to the worry list at the IMF-World Bank annual conference. Although this week’s meetings have focused on immediate threats such as the simmering trade tensions between the United States and China and an emerging market debt crisis, there is a growing realisation among policymakers, senior bankers and analysts that rising price pressures could soon force central banks’ hands.
“Inflation is going to be a problem over the next year,” said the head of the investment banking division at a global bank. “This time next year it will be a worry, but right now not enough people are concerned about it. We’ve had 10 years without it. But it’s coming back and it could be a real issue.”
Juan José Echavarría, governor of the central bank of Colombia, told GlobalMarkets: “Everybody should worry about new inflation because economies are booming. It is a very tricky question, because for many years we did not have inflation at the international level. If you talk to the central bankers in the advanced countries, they keep telling you that they do not understand very well what is going on.”
The immediate focus is on the US, where President Donald Trump jolted markets this week with his verbal intervention on monetary policy, accusing the Federal Reserve of “craziness” for its programme of gradual interest rate rises. But Echavarría said the US economy was booming, the labour market was very tight, while on top of that Trump’s expansionary fiscal policies would fuel growth.
Taimur Baig, managing director and chief economist, group research, at DBS Bank, said monetary policies were invariably going to tighten in this cycle, despite signs that the growth cycle is near the peak. “But that does not exempt central banks from the need to continue normalising policy,” he said. “It’s a tricky balancing act. In a 12 month horizon, nobody is particularly bearish about growth, and the risk of inflation has risen because of oil, tightening and trade wars.”
Robin Brooks, chief economist at the Institute of International Finance, said emerging markets needed to keep an eye on wage inflation in the US, which might force Fed chairman Jay Powell to raise rates faster than markets expected. “Given how poorly risk assets behaved early this year when average hourly earnings grew above expectations, we see this as a potential risk event for EM in the near term,” he said.
The trigger could come as soon as next month, when October wage inflation data could show a spike. “What worries us from an EM perspective is that risk assets reacted poorly earlier this year,” he said. “We therefore flag this as a near term risk for EM.”
World Bank chief executive Kristalina Georgieva told GlobalMarkets she was worried about the record $164tr global debt mountain. “With interest rates climbing up and dollar appreciation, especially for economies that are burdened with dollar denominated debt, we already see very troubling signs.”
The IMF has played down the risk. Chief economist Maurice Obstfeld said at the launch of the Fund’s World Economic Outlook this week that core inflation rates were “largely quiescent”, thanks to robust policy frameworks “anchoring” inflation expectations.
Claire Dissaux, head of global economics at Millennium Global, agreed, saying lower growth across emerging markets meant there was “far less” inflation than during the last EM crisis. “Inflation expectations are also better anchored because fiscal discipline has improved since then too,” she said.