The end of an era? A really interesting long term perspective in the Economist, suggesting that this is the end of the 2% inflation target, and that there are good reasons to move to 3-4%.
I imagine though that this still requires some painful readjustment in the next few years to higher interest rates for home buyers and businesses. Of course, higher inflation could help cushion that adjustment in nominal terms, but many will likely feel increasingly the pinch of managing to keep up with higher payments while incomes and profits probably take longer to adjust.
"One immediate fear is of a blow-up, as a financial system that has become habituated to low rates wakes up to the soaring cost of borrowing." Perhaps not in the public banks, but in the dark pools and private investment landscape. If the Musk Twitter transaction actually closes, watching the performance of that debt will be indicative.
"In a big shift from the 2010s, a structural rise in government spending and investment is under way." Ageing citizens and geopolitical tensions guarantee increased spending in health care and defense, while there remains an inevitable investment required to transition off the carbon economy.
But, "As people get older they save more, and this excess of savings will continue to act to depress the underlying real rate of interest." Japan is a case study from recent decades.
So, the Economist argues that 3-4% might be the better target to allow a level of inflation and interest rates that better stimulates nominal growth, allowing the investment spending needed while countering the saving of the elderly.
The main risk here seems to be that a more severe downturn in asset prices, coupled with a sharp acceleration in health care, during the next few years could of course could certainly wipe out more of those savings and lead to higher inflation. So, if banks do aim higher, they could unleash something much higher.
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