The IMF has just issued a major report addressing worldwide consumer price inflation.
The IMF urged central bankers to keep raising interest rates, and discouraged broad government spending boosts or tax cuts.
“Don’t provide subsidies to the rich,” IMF Managing Director Kristalina Georgieva said last week. “Don’t go for blanket price controls that benefit the poor but also benefit the wealthy.”
The IMF clearly understands the difference between monetary policy (raising interest rates, which mostly impacts asset prices) and fiscal policy (government spending and taxes, which directly impact consumer spending).
When the central bank raises interest rates to reduce inflation but the government sends more money to consumers (without increasing the supply of goods and services) the monetary and fiscal powers are working at cross purposes.
“It’s like having a car with two people in the front and each of them has a steering wheel and you’re trying to steer the car in a different direction,” Pierre-Olivier Gourinchas, director of the IMF’s research department, told reporters. “That’s not going to work very well.”
It’s good that the IMF understands inflation, but that won’t necessarily impact world inflation one teensy bit. Each country has its own policies which respond to political influences.
As investors, we need to understand the situation so we can adjust our investments.
For the short term, M1 is beginning to drop. But consumer borrowing is still rising fast.
For the long term, the government has mind-boggling liabilities (mostly Medicare and Social Security) which will inevitably be inflationary.
This is led by the US centric position on the long wave. Since we are in the early period of demand side economics that is the play. Those are the rules. But monetary and fiscal policy interact. If assets decrease in value consumer spending can rise. Meaning if oil costs less consumer spending can rise with much less inflation. Consumer spending has much less impact on inflation. Or if taxes rise on the top earned income bracket luxury goods do not rise in price nearly as much. Luxury goods leading the inflation in consumer goods.
The relations are resetting for the period we have entered.
Globally the other nations are at different stages on the long wave. The UK is supposed to be more in lockstep with us. The EU on the flip side of taking up supply side economics.
The rest of the western world are more offset than the UK but with us in demand side econ, mostly.
The third world including China where the pegs to the USD are more in keeping with how they derive their wealth are getting hurt very badly.
India I have not studied. The slower approach to industrialization than China’s, the democracy, and savvy tech sectors could stand India in very good stead going forward.
Key investments in central European monopolies might be some of the best investments any of us can make.