Calling inflation “the dog that didn’t bark,” the International Monetary Fund on Tuesday said the massive monetary easing undertaken by major central banks in recent years poses little risk of sparking a damaging run-up in prices down the road.
Since the 2008 economic crisis and with the economy still weak, several of the world’s central banks have pumped trillions of dollars into the system through asset purchases and other unconventional tactics, a strategy that was reinforced last week when the Bank of Japan announced an aggressive new program.
The policy has been considered necessary to keep the economies of the developed world growing. But it has also raised concern that as growth strengthens, unemployment declines and the “slack” is taken out of the system, it will cause a rapid rise in inflation — potentially damaging in its own right.
With all that money in circulation, so the argument goes, it will eventually be used to bid up prices for goods, services and workers.
But in new research released before the IMF’s spring meeting next week, the fund said it believes the nature of inflation has changed in recent decades, becoming less volatile, and less likely to rise or fall in response to underlying changes in the economy. In class economic theory, prices and unemployment have an inverse relationship; when unemployment rises, prices tend to fall because people make less money and have less bargaining power to demand higher salaries. The reverse is expected when unemployment falls.
Although that general relationship remains, the connection has become less pronounced. In technical jargon, it means the Phillips curve has become nearly flat, so that any rise or fall in the jobless rate has less of an effect on inflation.