Central bankers in developed economies are downplaying the risk of long-term inflation rises, according to a new paper by the Fraser Institute.
“Absent a sharp reversal of central bank programs of quantitative easing, forecasts that inflation will return to the two per cent target rate of central banks by mid-2022 at the latest are likely to prove spectacularly wrong,” wrote author Steve Globerman, a resident scholar at the Fraser Institute.
Between 1991 and 2020, per annum inflation averaged 1.9 per cent in Canada and 2.3 per cent in the U.S. In both countries, the central banks predict that inflation, which ballooned to 4.7 per cent in Canada and 4.6 per cent in the U.S. in October, will sink to around two per cent by the middle of 2022.
“While the rate at which money balances are changing hands has yet to register a noticeable pickup over the past year, the rate of growth of the money supply has accelerated dramatically. If the velocity of money does start to return to its much higher historical average value, the accelerated growth of the money supply will result in a substantial increase in aggregate demand.”
As a result of aging workforces and green energy mandates, Globerman predicted that the output of developed economies won’t grow as quickly in the 2020s as it did in the 2010s. Under the circumstances, he said he believes central banks can still reduce the risk of long-term inflation by reversing monetary policy measures to buy private sector debt and government bonds. But he also suggested such moves may not be politically tenable.
“Central bank officials may well find themselves squeezed between the ‘rock’ of government financing needs and the ‘hard place’ of sustained inflation,” wrote Globerman. “Continued delays in making the politically fractious decision to tighten monetary policy increase the likelihood that developed economies will again experience the devastating inflation of the 1970s and 1980s.”