In the soon to be released IMF World Economic Outlook, the IMF make the following claim:
“…the Phillips curve is considerably flatter today than in the past, and the inflation consequences of changes in economic slack are therefore much smaller. Second, inflation expectations are much better anchored now than in the past. Together, these two factors largely explain why the declines in inflation during the Great Recession were small. It also follows that these small declines are consistent with continued economic slack in most advanced economies. An important policy conclusion is that, as long as inflation expectations remain firmly anchored, fears about high inflation should not prevent monetary authorities from pursuing highly accommodative monetary policy.”
There are two things that strike me immediately about these claims:
The first is that much of the monetary stimulus of the late 1990s and 2000s was asset focussed, much more so than in earlier decades and the impact of monetary growth, in terms of inflationary impact, much reduced. This is not touched upon.
The second is that real wage growth has been historically low in a number of advanced economies, especially during the 2000s. Wages are less likely to fall if their growth rate has already been constrained. A related item, is that the 2000s was also a period of phenomenal growth in world trade, especially to and from emerging economies, in particular China. Greater global competition has arguably helped keep a lid on labour costs.
While the world is still reeling from the build up of asset focussed money supply growth, there will continue to be deflationary pressures, but this is not to say that at some point in time that inflationary risk will not once again re-emerge. It may only appear as if expectations are firmly anchored, when more to the point, it may be that what appears to be expectations are hostages to forces outside our control.