A potential problem is looming, and the media are pursuing a new story that builds on the following chain of reasoning: 1) higher inflation is coming;2) if CBs increase interest rates debts will explode and recession may ensue; 3) CBs are caught in an impossible dilemma 1/12
It´s perhaps too complex for some tweets, but.. Registered inflation this year is bound to be higher than present forecasts, resulting from one-off price spikes and base effects That will not start a sustained high inflation process, but temporary higher inflation is possible 2/
For example, Euro Area inflation increased suddenly from several months at -0.3% to +0.9% in Jan. This jump resulted mostly from several base effects, especially the change to German VAT. Inflation expectations increasing but higher in the US than in the EA 3/
The major one-off base effect will come from oil prices that decreased abysmally in March 2020 and have recovered. Some estimates put US inflation in April reaching 4%! After vaccinations, later in the year, pent-up consumer demand will also increase prices.4/
Despite the increased spending of accumulated savings, the savings rate will remain higher than before Covid for precautionary reasons (Fig 1). No permanent spending spree will materialise. Wages will remain subdued for a while (Fig2). Higher but not high inflation is coming.5/