The economic contraction wrought by efforts to contain the coronavirus is shredding inflation. Now deflation, a prolonged period of falling prices, is stalking the globe. The collapsing oil market is both a symptom of weaker demand and cause for a deepening slump.
Huge levels of stimulus are likely to be required long after the pandemic subsides. Yet concerns about prices moving up – or even down, for that matter – are starting to feel like an afterthought.
That's a mistake. For decades, inflation was the most-preferred way to assess economic health; whatever its flaws, targets in the vicinity of 2 per cent gave global central banks a quantifiable guidepost. If there are alternatives, they haven't been proposed.
Few, if any, central banks have a measurable employment target; the same goes for gross domestic product. They have estimates and projections, but not fixed goals. Repairing labour markets and supporting the overall economy could very well become the new rationale, but let's say so and add some numbers to anchor policy going forward.
It's understandable that the human tragedy of climbing unemployment and the nosedive in the broader economy is taking precedence for policymakers. Inflation targets seem arcane, even churlish, in times of existential crisis. Certainly, there’s little prospect of a meaningful spike, if history is anything to go by. A decade ago, conservative economists wrote an open letter to then-Federal Reserve chairman Ben Bernanke warning that the Fed's quantitative easing would provoke runaway inflation and dollar debasement. This didn't happen.
Even allowing for decent bounces in growth later this year and in 2021, it's likely to be a long time before anything resembling normal price increases reappear. Remember that policymakers were fretting about anaemic inflation even before the pandemic struck. In its wake, global inflation may slip below zero, according to the consulting firm Oxford Economics. Consumer prices in advanced economies will rise just 0.5 per cent, down from 1.5 per cent in 2019, according to the International Monetary Fund. In Japan and South Korea, inflation will be much closer to zero; in Singapore and Thailand it will likely be negative. Even Australia and New Zealand, where levels were relatively close to target before the pandemic, are reviewing their forecasts.
If central bankers are worried about these figures, it’s not the first thing that flows from their lips. In Japan, inflation has curiously faded from prominence in recent communication from the central bank. Elsewhere, policymakers are pursuing inflationary programmes without devoting much attention to the consequences. New Zealand, which used to trumpet its role as a pioneer of such targets, may start buying bonds directly from the government. Aimed at adding to fiscal firepower, the concept was sacrilege not long ago. Such measures are already under way in Indonesia and the Philippines.
In Australia, the Reserve Bank recently reviewed the first month of zero rates and efforts to cap bond yields. Governor Philip Lowe emphasised a rout in employment and the severity of the decline in GDP. Prospects of deflation and prolonged low inflation took a back seat in a question-and-answer session after his April 21 speech.
As the coronavirus spreads, unemployment will surge and special monetary operations will continue. But when the shock of the lockdown wears off and the extent of the slump becomes apparent, it will be easy to forget how these expansive policies started in the first place. They will need to be justified, especially if – or more likely, when – central bank excursions into fiscal policy become contentious. At that point, monetary authorities need to be armed for the inevitable backlash.
If the direction of prices remains the sun around which policy evolves, better hope that inflation (or deflation) re-enters the vocabulary soon. The emerging risk is that we occupy a halfway house of elevating jobs and growth, without a formal metric that defines success. In that case, policy could easily spin out of orbit.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies