Inflation likely to remain stable in advanced economies: IMF

Washington, April 10 (IANS) Massive monetary stimulus taken by the major central banks is unlikely to ignite inflation as the inflation expectations have become more anchored than in the past and the response of inflation to changes in cyclical unemployment has become more muted, said the International Monetary Fund (IMF).

“Inflation has been remarkably stable in the wake of the Great Recession even though unemployment has increased significantly,” the IMF said Tuesday in its latest World Economic Outlook (WEO) report.

In contrast to previous recessions when the inverse relationship between inflation and unemployment appeared relatively steep, inflation in advanced economies has not fallen sharply during the latest recession, and it is unlikely to spike as the recovery strengthens, Xinhua qouted the IMF as saying in the analytical chapters of its flagship WEO report.

The relative stability of inflation reflects the success of inflation-targeting central banks in anchoring inflation expectations and less responsiveness of the inflation to the changes in economic conditions, it analyzed.

Since the onset of the financial crisis, major central banks have been pumping massive stimulus into the economy. The US Federal Reserve has kept the short-term interest rate near zero for over four years and now buys $85 billion of treasury securities and mortgage-backed securities each month.

While the US economy is struggling on its way to recovery, inflation persists below the Fed’s 2 percent target and growth has not been strong enough to achieve significant reduction in unemployment. The Fed has pledged to bolster the economy until the unemployment rate falls to 6.5 percent or inflation looks likely to exceed 2.5 percent.

The report suggested that ongoing monetary accommodation of major central banks is appropriate given the current economic slack in most advanced economies, and it is unlikely to have significant inflationary consequences, as long as inflation expectations remain anchored.

“An essential element behind the anchoring of inflation expectations is the independence of central banks,” said John Simon, lead author of the report.

Notwithstanding this, policymakers must remain alert to possible economic imbalances that may not be reflected in consumer price inflation but in rampant inflation of asset prices including for housing, the report warned.

The WEO report was released prior to the spring meetings of the IMF and its sister agency World Bank, scheduled to kick off April 19 in Washington D.C., which would draw central bankers, finance ministers and other experts to discuss key global economic issues and policy actions.

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