Money changers' potential influence on the rate of inflation
In the world of global finance, a persistent puzzle has emerged: why has inflation remained low in major economies like the Eurozone, United States, and Japan, despite significant monetary easing efforts?
During Mario Draghi's tenure as the European Central Bank (ECB) President, he faced a historically low level of inflation due to the financial crisis and the European sovereign debt crisis. Similarly, the Federal Reserve under Jerome Powell is currently reassuring markets and the public that the increase in inflation is temporary. However, the ECB and other central banks have yet to provide a definitive answer for this conundrum.
Several factors contribute to this persistent low inflation. Weak economic growth and demand, as evidenced by modest growth forecasts for regions like the Eurozone (~1% in 2025), limit upward pressure on prices. China also shows slight or near-zero inflation amidst a weak real estate sector and subdued domestic consumption, reflecting restrained demand globally.
Central banks' efforts to combat inflation through aggressive interest rate hikes in 2022-23 have yet to fully stimulate inflation due to persistent economic slack and cautious consumer and business behavior. Stable or moderating core inflation components, such as services inflation in the U.S. and the Eurozone, also dampen overall inflation momentum.
Global disinflationary trends and subdued wage pressures, as seen in many emerging markets, provide central banks with some room to ease policies without reigniting inflation significantly. Supply chains and globalization factors continue to exert downward pressure on prices.
Geopolitical and trade factors, such as tariffs and trade tensions, have had mixed effects and have not driven sustained inflation globally. While they may cause localized inflation spikes, their broader impact has been limited.
Monetary policy confidence anchored inflation expectations, focusing on keeping inflation near target (2% for the Fed and ECB), has helped keep actual inflation low.
Looking ahead, if the commodity price cycle gains momentum and inflation persists above average inflation targets, central banks may face challenges in the coming years. The ECB, for instance, is planning to announce a longer-lasting monetary stimulus at its next interest rate meeting to make faster progress on the inflation path.
The ECB's overall inflation currently meets its new inflation target of a symmetric goal of 2 percent in the medium term, as announced recently. The Federal Reserve has shifted to an average inflation target of 2 percent, allowing for temporary overshooting after periods of low inflation. Central banks should seek the reasons behind the decrease or increase in inflation, rather than just monitoring inflation numbers.
In conclusion, the combination of modest economic growth, stable core inflation elements, ongoing global disinflation trends, and cautious transmission of monetary easing explains why inflation remains persistently low in major economies despite central banks’ significant stimulus efforts.
In the realm of global business, banks and financial institutions play a crucial role in implementing monetary policies designed to combat low inflation, such as aggressive interest rate hikes in 2022-23 by central banks. Moreover, the overall economic growth of major economies like the Eurozone, United States, and Japan, which is currently modest, contributes to the persistently low inflation.
