Is inflation dead?

Was it killed by central banks, with high interest rates? Or is it not dead at all but just lurking around the corner, soon to return with a fear of retaliation? Inflation never disappears completely. In history, there have been periods when it was dormant, but revivals have always been painful.

“In a dark room you move with tiny steps. You don’t run but you do move.”

Mario Draghi

President of the ECB, Mar 7, 2019

“In a dark room you move with tiny steps. You don’t run but you do move.”

Mario Draghi

President of the ECB, Mar 7, 2019

‘Absence’ of inflation

Since 2008, facing deflation fears, central banks have also adopted ultra-accommodative monetary policies, with sometimes the addition of non conventional measures (QE programmes). Unfortunately, inflation is still largely absent. The puzzle of “missing inflation” can be explained by the structure of the labour market, the lack of bargaining power of employees, competition, the lack of inflation expectations partly due to the extreme credibility of central banks, and, especially in the Eurozone, the weakness of the structural component of inflation.

“The market has overestimated the slowdown in the US. We are going to have a little bit of a slowdown, particularly in the 2nd quarter, but US consumers remain in a very, very good shape.”

Ken Taubes

CIO of US Investment Management at Amundi Pioneer

AmundiWIF19

“The market has overestimated the slowdown in the US. We are going to have a little bit of a slowdown, particularly in the 2nd quarter, but US consumers remain in a very, very good shape.”

Ken Taubes

CIO of US Investment Management 

at Amundi Pioneer

AmundiWIF19

In recent months, the trajectory of underlying inflation has tended to normalize in the United States, stabilizing slightly above 2%. While the unemployment rate is very low and the capacity utilization rate very high, the unit wage costs increase little and the underlying inflation does not progress. On that account, the flexibility of supply in the United States is crucial to explain the absence of inflation at the end of the expansion period. At the same time, inflation remains anchored around 1% in the Eurozone, where unit labour costs rise (difference with the US), but where companies have not the capacity to raise prices due to competition. Here lies the question of the structural weakness of inflation in the euro area. 

“We don’t see inflation expectations as de-anchored, at least we don’t see the same situation as in 2016.”

Natacha Valla

Deputy Director-General of Monetary Policy, ECB

AmundiWIF19

“We don’t see inflation expectations as de-anchored, at least we don’t see the same situation as in 2016.”

Natacha Valla

Deputy Director-General of

Monetary Policy, ECB

AmundiWIF19

End of inflation: advanced vs. emerging countries

Fundamentally, the “absence” of inflation comes from the nature of the jobs created, the lack of bargaining power of employees and/or the lack of capacity of firms to pass eventual wage increases in output prices. Ergo, questioning the structural weakness of inflation in the advanced countries. Reminding us that the theme “end of inflation” refers to some developed nations, and that emerging economies have higher inflation rates close to 4% – 5% (Russia, Brazil, India in particular) while Turkey is struggling with inflation close to 15%. 

Why is it important to question the end of inflation? 

First of all, because there are no more inflation expectations and a rise – even a small one – is likely to have significant impacts on the financial markets and economies, and second, because it also affects very directly the objectives, instruments and prospects of central banks and governments.

“Are central bankers lost? 100% yes.”

Janet L. Yellen

Chair – Board of Governors –  Federal Reserve System (2014–2018)

AmundiWIF18

“Are central bankers lost? 100% yes.”

Janet L. Yellen

Chair – Board of Governors –

Federal Reserve System (2014–2018)

AmundiWIF18

Governments and central banks are most likely to be under pressure, and among the “solutions”, lower taxation and rising wages are at the forefront. In other words, the shock which is supposed to represent the only way / risk for inflation to rise could come soon, earlier than generally expected.

Central banks face new challenges 

Critics claim that the main problem of central bank independence is that it was introduced to solve a problem – high inflation – that no longer exists. Their independence would prevent them from using more direct and effective solutions to solve current problems. According to the critics, their role should be revisited, whilst the main problem is not inflation anymore, but deflation, over-indebtedness, climate change and financial crises or to put it simply, the world since 2008.

“Climate Change should be part of our mandate of central bankers, not only for financial stability reasons…”

François Villeroy de Galhau

Governor Banque de France

AmundiWIF19

“Climate Change should be part of our mandate of central bankers, not only for financial stability reasons…”

François Villeroy de Galhau

Governor Banque de France

AmundiWIF19

Overall, inflation is not dead, it is dormant, different, and potentially on the rise. Whatever and whenever the next step, uncertainty is still ongoing, and central banks as well as other institutions, will have to continue to navigate without having a perfect knowledge of what the post-financial crisis “new normal” is going to be. 

Review the discussion threads and main highlights from the Amundi World Investment Forum 2019 edition on

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