We just published our report mapping the inflation developments we expect to see as a result of probably another decade of QE ahead.
From the shortest lag to the longest lags, it is useful to think about five inflation channels:
- Asset prices (almost coincident with monetary stimulus).
- Commodities and housing inflation (showing quickly after monetary stimulus).
- The output gap and demand-led inflationary pressures (working with a lag of one-to-three years).
- Competition (a broad spectrum that influences the pattern of input prices in the near term, as well as long-term shifts in different sectors).
- Last but not least, the institutional framework (this works over many years, and it reflects changes in physical constraints, like building a motorway or enhancing agricultural output, as well as ideological shifts, such as changing the central banks’ mandate or increasingly sticky inflation expectations).
Implicit in the background there is also an environmental cost from shortening the life span of goods and services (accelerated depreciation) – which is de facto a form of inflation, but one that it is not monitored at all by policy makers and has significant financial cost for families, as well as long term health and environmental costs to the whole planet.
The current inflation target framework is not adequate to the challenges we face and will unfold in the coming decade.
It is time we refresh the approach.