Inflation risk is not an illusion
Shall the world economy be able to return to reasonable growth rates again without entering a new inflationary era? Creeping inflation in leading Western and emerging economies, including Turkey, prevents a realistic answer to this question. On the other hand there is not a definite sign of a fast economic recovery in the United States on the eve of the presidential elections and everybody is aware of the gloomy situation in Europe and even in East Asian economies.
Then it is not easy to estimate the intentions of governments in those areas. Will they prefer mild inflation instead of stagnant markets, or will they accept concerns about the probability of new surge in inflation? Naturally most of the politicians who face this dilemma will say that the inflation risk is overstated in order to justify providing more monetary stimulus. But, the leader of the leading economy in Europe, German Chancellor Angela Merkel, is still reluctant for the European Central Bank to do more; she still says first fiscal then growth pact, even though it is expected that she might have changed her mind slightly after the French elections.
In addition there have been some rumors that the Bundesbank, the most hawkish central bank in Europe, gave some signs that it could accept higher inflation if it was necessary to rebalance the eurozone economy. This could soothe the assumed tension between the newly elected French President François Hollande and the German Chancellor Merkel, so it was hoped that they might find a middle way between austerity and growth. Ms. Merkel said after their meeting last Tuesday that both leaders had agreed to discuss all ideas on measures to boost growth before the June summit in order to reach a common package.
If this package is a ‘’middle way’’ solution, it must be realized that there is no such a middle way as history has proved. Knowing this truth well, the European Central Bank rejected the speculation that it has softened its anti-inflation rigor. However the defeat of Chancellor Merkel’s party in North Rhine-Westphalia elections has shown that a sizable group of Germans are also against the austerity measures. This will create additional political problems for Ms. Merkel and maybe some economic woes for Germany.
For the sake of economic recovery and to ease the unemployment problem, mild inflation might have seemed reasonable for some political leaders. However as past experiences proved, mild inflation can get out of control very quickly without even giving any indication. Turkey faced that kind of inflation surge several times during the last 60 years.
Some governments that face stagnant markets but also are afraid of inflation might decide on so-called ‘’middle way’’ solution as the leaders of the eurozone are now looking for. That was a policy which gives a mild push to total demand and at the same time to control any increase in consumer prices by implementing tight monetary and fiscal policies further whenever it is necessary. However those middle-way solutions have proved to be as risky as the “mild inflation’’ alternative.
To summarize, the inflation risk is not overstated and is still real for every country, including Turkey, which faced a record jump in the consumer price index in April. The Central Bank of Turkey declared that this jump was expected and there would be an important drop in May, so it is not necessary to change the year-end and mid-2013 targets which are 6.5 and 5 percent. However the unemployment increases during the recent months, slowing industrial production and growth, and the recent rise in inflation might create a false impression about the fate of the economic policies during the coming months.
Some might think that it was the change in tight monetary and fiscal policies which probably triggered the jump in April inflation and if the government desires higher growth after seeing the first quarter’s insufficient figure, the change in policies will continue and inflation might follow the same tendency. It would not be easy to convince everybody that the base effect was one of the main reasons of that undesirable growth figure. In addition the same base effect might hold growth rates of the second and the third quarters below expectations and might intensify false projections about the future of the economic policies.
All these might seem delusions for professionals. However the professionals are also aware of the importance of inflationary expectations which is the main enemy of anti-inflationary policies. If inflationary expectations are shared by the majority of the people, the professional minorities, including monetary and fiscal authorities, generally become helpless as has been experienced several times in the past.