The recent cover of the Bloomberg Businessweek featuring the title Is Inflation Dead supposedly expressed the conundrum that has central bankers raising their eyebrows. How come inflation rates in the most developed countries of the world are still below the target rate of 2% despite the prolonged programmes of QE, quantitative easing ?

The conundrum loses some of its mystery if one listens to the critics of the said programmes, pointing out that the money created in the process does not reach consumers’ accounts but goes to asset markets, which implies shrinking consumption.



A particularly detrimental effect of such asset allocation is felt in the German economy where recent protests gave voice to the people’s concern about the rising costs of housing in this country. As absentee ownership increases in this country where tenants predominate, the danger of undermining the country’s competitiveness grows. Affordable housing plays an important role in the Germany’s competitive costs of industry and labor.

One should, of course, not assume that central bankers are really in the dark about this matters. If inflation was defined as an increase in asset prices, the headlines would be quite alarming, putting pressure on central banks to stop their cash transfers to the banking and corporate sectors.

Central banks are still using inflation as a measure of how much quantitative easing can be released into the system. Especially ECB used to justify QE by inflation staying below the target of 2%.

Why is this important? In more ways than one, but one factor which does not emerge too often in the media is the type of assets and investments the QE money has gone to so far. The complete withdrawal of QE could cause an abrupt price correction. So the question central bankers should be asking is: Have the investments of the corporate and banking sector been productive enough to be able to start diminishing their debt burden?



Goldman Sachs argues that despite the low growth of Consumer Price Index (CPI), the effects of tariffs is inflationary and can be seen in prices of the affected goods that have risen at more than the overall inflation rate. Moreover, their study reveals the effects of the tariffs are carried entirely by US businesses and households. Could the rate of inflation accelerate as it gets layered several times through the economy and cause the FED to reconsidered its interest rate policy?



Combining rising asset prices with the shrinking consumption by households that have to spend a substantial part of their income on debt servicing with less remaining for discretionary consumption gives us an uneasy prospect of the future and the growing likelihood of a financial crisis. Prolonged QE, low inflation expectations and low interest rates make it harder for central banks to react in a crisis situation as their main weapons are already engaged.

Behind the no inflation story lies a prolonged process of low interest rate money transfers to the banking sector, causing misallocation of resources that undermines the economic security of households and elevates the risk of financial instability in the future. Thus, the story of low inflation in the most developed countries of the world is linked to the growing insecurity about the future economic growth.


David Prezelj
David Prezelj

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