(The author is Finance and Markets Editor at Reuters News. All opinions expressed here are his own)
By Mike Dolan
LONDON, April 27 (Reuters) – Central banks risk losing the battle for price stability as long-dormant stories and memories of inflation reawaken, adding a more complex psychological twist to the task than simply tightening inflation. monetary policy.
Far from being just a matter of excess money, as strict monetarists point out, many economists believe that the return to a regime of high inflation hinges as much on changing popular narratives that entrench expectations and alter behavior households and businesses.
And this change in behavior – in wage negotiations, corporate price-setting or even the indexation of government spending – fuels and entrenches the rise in inflation over time. It is the “unanchoring” of expectations that central banks claim to fear the most.
Because this mainstream narrative is usually shaped in the media – both traditional newspapers, broadcasters or online news as well as social media or digital forums – tracking the themes of what makes headlines becomes a valuable tool.
And the speed at which that narrative can change now in a world of such fast-paced, pervasive media is much faster than when inflation was last so high – four decades ago.
If it were just the money supply, you might have expected near-zero interest rates and central bank money printing over the past decade to have had more than the modest flicker they had on underlying inflation rates. And yet, all that money seems to have ended up in financial assets instead – driving up neither wages nor consumer prices.
But a jolt from the pandemic followed by the more recent energy price shock changed the dial for the first time in decades.
Amundi Institute President Pascal Blanque has studied for years the role of changing media narratives in improving purely digital business and investment models and insists that his long-held belief that which we are heading “towards the 1970s”, the regime of high inflation is supported by this analysis. .
These changes can happen suddenly and exponentially, he believes, because short-term memories link skyrocketing inflation rates in the past year to long-term memories of past inflationary periods. This process is already underway and it is probably too late for central banks to stop it, even if they want to.
“Narratives play a role in inflation spreading exponentially like a virus, turning it into a mass phenomenon with feedback loops and self-fulfilling prophecies,” he said, adding that intelligence artificial allows us to analyze them more easily.
“People form expectations the same way they remember and forget,” he said, referring to what he called a “forgetting coefficient” that increases the further you go. of an episode or a shock, but which can then change suddenly, with the media. acting as a booster and an “accelerator”.
Blanque’s team used Google-based collaboration GDELT – or the Global Database of Language and Tone of Events – to monitor this flow of information around the world. These clearly showed that the daily volume of inflation “identifiers” had more than doubled over the past year and surpassed the peaks of the COVID equivalent in March 2020.
Moreover, constructing broader themes from this research showed that rankings dubbed “Roaring 20s” or “Back to the 70s” or “Geopolitical Risk” consistently outperformed competing narratives such as “secular stagnation,” which characterized the global economy in the decade after the 2008 banking crash.
Other researchers who closely monitor news sentiment find something similar. Economists at Absolute Strategy Research say their Global Inflation News Feed Monitor is pretty much in line with 10-year inflation expectations in bond markets and is at its highest in at least 20 years.
The ASR also points to soaring mentions of inflation in corporate earnings calls – the highest in at least 20 years and more than three times the share of calls that fell into this category at the start of the year. last year.
But is this much different from what we already see in the monthly inflation reports themselves or the more prosaic readings of market-based inflation expectations and consumer surveys?
Inflation expectations captured by breakevens in 10-year US Treasury inflation-protected bonds briefly topped 3% last week for the first time in 25 years before falling back.
The University of Michigan Household Inflation Expectations Survey has a 1-year outlook above 5%. But this is still below the prevailing underlying inflation rate and expectations are falling back to 3% over a 5-year horizon.
These are a far cry from the double-digit inflation rates of the 1970s.
But Amundi’s Blanque thinks the scale of the shift in public discourse means this is just the beginning and US inflation of 4-5% was now a more likely scenario over the coming years.
He believes that central banks are deliberately “lagging behind” inflation, that they will remain so even if they tighten policy ahead and may well avoid recession in the process.
Along the way, they and their governments will be tempted by the benefits of higher inflation by generating higher growth in nominal wages and output and by inflating debts. The biggest casualty could be what he called the “grand monetary policy consensus” among central banks in favor of a patchwork of different approaches and a crisis of orthodoxy. Associated columns:
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The author is Finance and Markets Editor at Reuters News. All opinions expressed here are his own.
(by Mike Dolan, Twitter: @reutersMikeD; editing by Chizu Nomiyama)