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As household income drops, central bankers push for higher prices – Dateway

Central banks remain obsessed with inflation. Current monetary policy is like the behavior of a reckless driver going two hundred miles an hour, looking in the rearview mirror and thinking, “We haven’t crashed yet, let’s accelerate.”

Central banks believe that there is no risk in the current monetary policy based on two misconceptions: 1) that there is no inflation, according to them, and 2) which benefits the – beyond risks.

The idea that there is no inflation is wrong. There is high inflation in the goods and services that consumers demand and actually use. The official CPI (consumer price index) is artificially kept low by oil, tourism and technology, masking increases in health care, rents and housing, education, insurance and food fees that are significantly higher than nominal wages and the official CPI indicates. In addition, in countries where energy taxation is aggressive, the negative impact on the CPI of oil and gas prices is not at all seen in consumers’ actual electricity and gas bills. .

A recent study by Alberto Cavallo shows how official inflation does not reflect changes in consumption patterns and concludes that real inflation is more than double the official level in the average basket of the covid-19 era and also , according to an article by James Mackintosh in the the Wall Street newspaper, prices are rising up to three times the official CPI rate for the things people need during the pandemic, even though the overall inflation count remains subdued. Official statistics assume a shrinking basket due to repeatable goods and services that we buy from time to time. As such, the prices of technology, hospitality, and entertainment are going down, but the things we buy daily that we can’t just stop buying are rising much faster than nominal and real wages.

Central banks will often say that these price increases are not due to monetary policy but to market forces. However, it is precisely monetary policy that strains market forces by pushing rates down and money supply up. Monetary policy makes it harder for the less privileged to live from day to day, and more and more difficult for the middle class to save and buy assets that grow due to expansionary monetary policies, such as houses and bonds.

Inflation may not be making the headlines, but consumers are feeling it. The general public has seen a steady rise in the price of education, health, insurance and utilities at a time when central banks felt compelled to “fight deflation” … a risk deflationary that no consumer has seen, let alone the Middle Class.

It is no coincidence that the European Central Bank is constantly worried about low inflation as protests against the rising cost of living spread across the euro area. Official inflation measures simply do not reflect the hardships and loss of purchasing power of middle class wages and savings.

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Inflationary policies therefore create a double risk. First, a dramatic increase in inequality as the poor are left behind by rising asset prices and the wealth effect, but feel the increase in basic goods and services more than anyone else. Second, because it is not true that wages will increase in line with inflation. We have seen real wages stagnate due to weak productivity growth and overcapacity while unemployment rates were low, keeping wages well below the increase in essential services.

Central banks should also be concerned about the growing dependence of bond and stock markets on the next injection of liquidity and the next rate cut. If I were president of a central bank, I would be really worried if the markets reacted aggressively to my announcements. This would be a worrying signal of co-dependence and the risk of bubbles. When sovereign states with massive deficits and weak finances have the lowest bond yields in history, it’s not a central bank success, it’s a failure.

Inflation is not a social policy. It disproportionately benefits the primary beneficiary of newly created money, government and asset-intensive sectors, and hurts the purchasing power of middle and lower class wages and savings. “Expansionary” monetary policy is a massive transfer of wealth from savers to borrowers. In addition, these obvious negative side effects are not addressed by the so-called quantitative easing for the people. Bad monetary policy is not the answer to worse. The direct injection of cash to finance rights programs and government spending is the recipe for stagnation and poverty. It is no coincidence that those who have fully implemented the recommendations of modern monetary policy – Argentina, Turkey, Iran, Venezuela and others – have seen an increase in poverty, lower growth, poorer real wages and destruction of the currency.

Believing that prices must go up at all costs because otherwise consumers can postpone purchasing decisions is generally ludicrous in the vast majority of purchasing decisions. This is clearly wrong in a pandemic crisis. The fact that prices go up in a pandemic crisis is not a success, it is a miserable failure and hurts all consumers who have seen their incomes plummet by 10 or 20 percent.

Central banks need to start thinking about the negative consequences of the massive bond bubble they created and the rising cost of living for the middle and lower classes before it’s too late. Many will say it will never happen, but acting on this belief is exactly the same as the example I gave at the beginning of the article: “We haven’t crashed yet, let’s step up.” Carefree and dangerous.

Inflation is not a social policy. It’s a daytime flight.



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