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Are We Experiencing a New (and Lasting) Upward Shift in Inflation?

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Abstract

The long wave of globalization will most probably lose part of its strength in the next few years. As a consequence inflation will not remain as low as it has been for the past three decades, where the growth strategy of emerging countries, especially China, has mainly relied on exports to the global market. The very success of this strategy implies that the western world would not still for long be able to pursue a growth strategy based on (excessively) cheap imports. A look at price indexes shows that inflation has been in the recent past on an upward trend and that it varies considerably across sectors. At the very least, the rate of inflation may become much more volatile in the decades to come. Besides the obvious consequence of actualizing its inflation target, the ECB should also rethink its policy (and its relationship with the other actors of economic policy in Europe) to put in place strategies aimed at accompanying the structural adjustment of the economy (that may be a cause of a slightly higher inflation). The increasing income inequality may also prove to be a problem for monetary policy, because it tends to generate stagflationary outcomes if it is not being taken care of. If the short term prospect is for the rate of inflation to decrease, the longer term prospect is that it may well decrease towards a new equilibrium rate higher that the preceding one which is reflected in the present objective of the ECB.
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hal-00973024 , version 1 (03-04-2014)

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Jean-Paul Fitoussi. Are We Experiencing a New (and Lasting) Upward Shift in Inflation?. 2008. ⟨hal-00973024⟩
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