The Bank of England predicts inflation will reach a peak of 5 percent in April. Isabel Schnabel of the European Central Bank said in November that inflation has probably already reached its peak. Janet Yellen, the US Treasury Secretary, was less precise: she simply said it would start to decline in the first quarter for some time. The Federal Reserve did not try to predict the timing of the turning point, but policymakers forecast inflation for the whole year will be roughly 2.6 percent, compared to about 7 percent for 2021. If these central bankers are right, inflation will disappear for much of 2022 – the economic bug of last year.
It just presents another challenge. Last year, central bankers were able to justify lack of action on the grounds that some inflationary pressures would be temporary and the world economy was still recovering from its pandemic-induced recession. To some extent, this year’s figures are likely to prove to be correct – even if their predictions are off the peak by a few months, or possibly percentage points. In part, the central bankers will have a statistical peculiarity to resign. Higher headline inflation last year reflects comparisons with the worst of the pandemic in 2020. The annual figures for 2022 will be compared rather flatteringly with the price increases in 2021.
There are other one-time effects. This includes, in the eurozone, reversing a pandemic-induced incision German value added tax. Even if prices for used cars and petrol remain high, they are unlikely to repeat their extraordinary rise – in the US, the two categories increased by 31.4 percent and 57.5 percent respectively in the 12 months to December 2021. . There are preliminary signs that backlogs in ports are easing while manufacturing companies report that delivery times for key components are improving.
Possibly shortages of durable goods could even make way for abundance in 2022. The Bank for International Settlements has warned about “bullwhip effects” as a temporary shortage of components leads companies to over-order and build inventory in anticipation of future problems. Initially, this additional demand – from consumers switching spending from services to goods – increases the strain on supply chains. Ultimately, however, this leads to a surplus as companies find that they have more at hand than they could possibly use or what their customers would want.
But just as it was wrong for central bankers in 2021 to overreact to the temporary factors that boost the headline rate of inflation, so too in 2022 they should not be misled by short-term trends that hold it back. Central bankers will, instead of explaining their lack of action in the face of rising inflation, have to stick to plans to tighten policies even if inflation falls. They should do what they have encouraged others to do, and concentrate on the details of numbers rather than the headings – stick to the scripture they set out on how to “tape” asset purchases and raise interest rates.
While so-called transient drivers of inflation will increasingly fall away, the public’s expectations of price increases are likely to catch up with the inflation seen over the past 12 months. This can become a self-fulfilling prophecy, especially as the labor market becomes even tighter as the grip of the pandemic fades – apart from the impact of any new variants. These factors, rather than the volatility of the global oil market or the peculiar issues of semiconductor manufacturers, are the real province of central bankers. Ironically, the biggest inflationary challenge for monetary policymakers will begin even when the highest price pressures disappear.