Programme Paper

Project: International Economics Department

Vanessa Rossi and Rodrigo Delgado Aguilera
  • Is inflation really a threat? While most analysts agree that there is little cost-push or demand-pull inflation in sight, there has been persistent unease over the potential impact of bailouts, fiscal stimulus packages and an exceptional monetary policy stance, including quantitative easing.
  • However, this paper puts the case that inflationary pressure from currently lax policy was in the past, not the future. Current bailouts funded excess spending and inflationary pressure in the boom years. Households and financial institutions were encouraged to pile up debt in part because they expected that even if a crisis were to occur, they could either default or be bailed out by governments and central banks. So presently lax policy represents late payment for goods already consumed rather than new spending.
  • The effect of wealth losses and weak income growth will repress inflation unless governments continue pumping money into the global economy regardless of changing conditions. Governments are unlikely to pursue easing this far - and, in any case, this point is still some way off yet.