Central banks don’t have much time to tackle inflation

The writer is a final year student at Harvard Kennedy School

It’s hard not to pity those who have to offer a macroeconomic outlook for 2022. The path to growth and inflation is inherently uncertain, and now there’s an additional unknown about the novel coronavirus variant, Omicron. . CEO of Moderna tell FT that existing vaccines may be much less effective against Omicron. CEO of BioNTech more stray species and hopefully those who are fully vaccinated will face only moderate illness. The World Health Organization says it is possible that this variant will be much more contagious, but agree that vaccines should protect against serious cases. And those are the experts.

With time, we will know the answer. But the central bankers who meet this month don’t have much time. NS US Federal Reserve meeting on December 14-15, Bank of England and European Central Bank on December 16. Will Omicron be a drag on demand demand stimulus? Or does a further boost to inflation require tighter monetary policy?

Best-case scenario, Omicron can be so transmissible that it becomes dominant, but causes only mild cases with no lasting effect – progressing to a version of seasonal flu. Another good outcome would be that the vaccine is still extremely effective and there are very few breakthroughs, which is average. In either case, the central bank’s base case – that inflation will peak next year as supply chain disruptions ease – will likely prove correct.

However, if this variant is transmissible enough to become dominant, cause severe illness, and possibly disrupt vaccines, the impact on global economies is certain to be dramatic, if unknown. clear. People can stop going to work again. According to an August survey by The Conference Board, fear of contracting Covid and fear of revealing a family member were the biggest worries of respondents about returning to the workplace. And this is in the context of highly effective vaccines, which are freely available.

If workers stay home because of the new variant, supply chain disruptions will be exacerbated and prices could rise more rapidly, a consequence Fed Chairman Jay Powell emphasized in a statement. congressional testimony this week.

However, the negative scenario could also lead to a much slower price increase. Even without the new variant, the increase in demand due to reopening of the economy is expected to ease. Real income and personal savings has reverted to pre-pandemic trends. Add to that a deadly virus for which we have little or no protection, and chances are people will stop going out and spending money as soon as the supply starts to increase next year.

Leaders in US and Europe have announced they will not impose new lockdown orders. But some may feel they have no choice. Austria imposes a temporary lock before the Omicron variant appeared to address the outbreak of the Delta variant. German Hospital had a Delta record download before Omicron came along.

Demand could increase even without a lockdown. Based on research Conducted by Austan Goolsbee and Chad Syverson of the University of Chicago, the fall in US travel in the spring and winter of 2020 is due more to voluntary behavior changes than to government-led lockdowns. mandatory government.

With inflation rising in Europe and the US, it is unlikely that central banks will put stimulus on the metal again. But will the variation soften their plans for a slow withdrawal? Even in the face of a drop in demand, monetary policy starts with a huge lag, and a vaccine can be tailored to new variations in a matter of months.

Omicron won’t take us back to March 2020. But it’s a warning that while this variant disappears, other mutations will almost certainly follow. You don’t really have to pity the central bankers, but you can cut their slack.

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