Inflation has re-emerged as an important and much-discussed issue around the world in recent months after having played little role in the global economy for several decades.
In the professional world, the current debate about currency devaluation is often presented as a battle between two camps, in which inflation is perceived either as a temporary or as a permanent threat: The camp, which appears confident of victory for some time and perceives inflation only as a temporary phenomenon , is increasingly getting into trouble.
However, it is not a question of which camp is better able to see into the future, because no one can do that: the future inflation rate remains difficult to forecast, especially in view of the current uncertainty.
In addition, it is not predetermined
Gerald Braunberger
Editor.
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The battle between the camps is primarily about the question of whether and, if so, how monetary policy should react to the recent increase in the inflation rate.
The supporters of the thesis of temporary inflation do not wish to abandon the monetary policy, which has been very expansive for a long time and has been characterized by record low key interest rates.
The proponents of the thesis of permanent inflation advocate turning away from the expansive monetary policy with, sooner or later, rising key interest rates.
A monetary policy that dampens economic demand
Monetary policy works in economic models by influencing aggregate demand. In modern models, this influence takes place primarily through the control of the expectations of the participants in the economic process (companies, private households, participants in the financial markets): If private households expect a significant rise in price levels, they could feel compelled to bring forward purchases planned for the future , and thus create the kind of inflation they are afraid of.
By taking convincing action against the risk of inflation, for example by raising its key interest rate, the central bank is preventing private households from buying ahead of time. At the same time, higher interest rates give households an incentive to substitute savings for consumption; it also slows down investment projects, for example in housing construction, by making credit more expensive. Inflation can be effectively combated by means of a monetary policy that dampens aggregate demand. However, such a monetary policy usually impairs economic growth, at least in the short term, simply by making investments more expensive. Proponents of stability policy would not deny these short-term adverse effects,but point to the long-term economic benefits of a low-inflation framework.