We need not fear the inflation ghost yet

Erasmus School of Economics

The Fed meets for the second day in a row to discuss interest rates. At the end of the day, it will be decided whether the interest rate can be raised again and whether the corona support measures can be phased out. Casper de Vries, Professor of Monetary Economics at Erasmus School of Economics, is a guest at BNR Nieuwsradio where he discusses his expectations of the meeting.

De Vries does not expect big news. ‘That has to do with several things’, he says. ‘Inflation is rising a bit now, because prices fell last year. So it is basically a catch-up effect, which we also see in the Netherlands and the EU. Moreover, the Fed has changed its strategy: it now allows inflation to be temporarily above 2%. So they can easily let it rise before they have to take action, which they have indicated themselves.’

In addition, the huge support packages will also have an effect on rising inflation. ‘That is why you can see something happening to long-term interest rates', says de Vries. ‘But I think it is still far too early.’

But we need not fear the inflation ghost yet. ‘Employment in America is not yet picking up that much. Unemployment can still fall quite a bit before wage pressure sets in. Only then can you have that price-wage spiral, but that will take some time. We saw the same thing after the credit crisis: the inflation ghost was invoked, but nothing came of it.'

More information

The full item from BNR Nieuwsradio, 16 June 2021, can be found here (in Dutch). 

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