Central bankers are joining Team Inevitability

If the sudden stop-start of pandemic lockdowns proved anything, it’s that central bankers can handle demand problems. Supply shocks are another ​matter. Central bankers visiting Washington, DC for the International Monetary Fund’s Spring meetings grimly assessed that ‌they could do little to prevent an immediate inflation spike from rising energy prices, and would instead fight to contain secondary effects as input costs spread elsewhere in the economy. After Covid-19, the debate centered over whether inflation would be a transitory phenomenon. Now, policymakers seem resigned ​to its inevitability. The question is whether they can tamp it back down.

Following joint US-Israeli strikes on ​Iran, Gulf conflict has throttled the Strait of Hormuz, cutting 13 million barrels of oil per day from global markets, according to the International Energy Agency. The effect on energy prices cannot be entirely stemmed ​by interest rate policy: central bankers cannot themselves replace lost crude.

For countries with sufficient near- and medium-term reserves, like Japan ​or South Korea, rising prices for fresh supplies are the issue. For most low- and middle-income Asian nations, obtaining physical barrels is the most pressing concern, something monetary policy cannot solve, said Bank of Korea’s departing Governor Rhee Chang-yong at a Peterson Institute event on ​the sidelines of the summit.

Initial price effects have shown up in consumer price indexes, but so far the damage has ​been limited to first-order effects on fuel. In the US, for example, the March consumer price index showed a 10.9 percent month-over-month increase in ‌the energy index, but stable core prices, which exclude food and energy.

Second-order effects are expected to hit shipping costs and petrochemical-dependent industries like plastics. The worst case, as ever, is that rising prices lead to spiraling wages as workers clamor for cost-of-living increases, setting off a feedback loop.

New Zealand Reserve Bank Governor Anna Breman noted that consumers and businesses change ​their behaviors based on headline ​inflation, not core, so policymakers must work to lower expectations after the fact.

Doing so can be painful and cause recessions, since the surest way to reduce anticipated prices is to suppress demand with lower ​interest rates. “That’s a dangerous, slippery spot to be in,” Chicago Federal Reserve President Austan ​Goolsbee said Tuesday ⁠at the Semafor World Economy conference, who foresaw disruptions preventing what he viewed as “appropriate rate-cutting.” At this point, Team Inevitability is only gaining members.

The International Monetary Fund cut its growth outlook on Tuesday due to energy price ⁠spikes as ​a result of conflict in the Middle East. Shipping disruptions in the ​Strait of Hormuz have affected global oil and gas supplies.

US consumer prices increased by the most in nearly four years in March amid a record ​surge in the cost of gasoline and diesel.