Central banks fear Omicron will keep inflation down

The Omicron variant goes around the world, closing borders and causing further restrictions on economic activity. Yet central banks, instead of easing monetary policy to support their economies as they did at the start of the pandemic, are preparing to ease stimulus and raise interest rates.

These measures reflect new thinking among policymakers on the economic effects of the pandemic: Central bank officials fear that instead of simply threatening to dampen economic growth, an increase in Covid-19 cases could also prolong inflation. high.

Last week, the Federal Reserve, the Bank of England and the European Central Bank all decided to tighten monetary policy in response to inflation fears.

When the pandemic first became widespread in early 2020, governments locked down their economies. Consumer spending fell sharply, employers laid off workers and prices fell. Within months, the rise of electronic commerce and remote working allowed the economies of many developed countries to recover rapidly. With mass vaccinations, this recovery continued this year.

Now, new outbreaks have much less severe impacts on spending and job creation. Instead, they threaten to prolong supply chain disruptions and keep inflation high.

“What we saw in the early stages of the pandemic was that demand initially fell a lot more than supply, so it ended up being deflationary, especially due to some pretty tight lockdowns,” Paul said. Ashworth, Chief Economist for North America at Capital Economics.

Today, with governments reluctant to impose new containment measures, the reverse is true, he said.

“Supply could potentially be more affected than demand and so it becomes inflationary rather than deflationary this time around,” he said.

Scientists are still studying the effects of Omicron. So far, it appears to be spreading faster than previous variants and is able to evade immunity to past vaccines and infections, but it could cause milder symptoms.

Speaking to reporters following the December 14-15 meeting, Fed Chairman Jerome Powell said, “Wave after wave people learn to live with it… The more people get vaccinated, the less the economic effect is significant.

For example, daily new cases peaked at more than 31,000 a day in the first two months of the pandemic last year. As states imposed stay-at-home orders, this resulted in a record annual decline of 31.2% in gross domestic product. In contrast, the number of cases peaked at around 250,000 per day in the first quarter of 2021, but the economy grew 6.3%.

The Federal Reserve has said it will accelerate the gradual reduction in its bond buying program, the biggest move the central bank has taken to reverse its pandemic-era stimulus measures. Here’s how tapering works and why it puts the markets on high alert. Photographic illustration: Adèle Morgan / WSJ

Governments have imposed fewer and more targeted restrictions with each wave. In addition, many workers and companies have adapted to epidemics, such as returning to work remotely.

Still, economists and investors expect Omicron to have a negative impact on growth, especially with international travel. In recent days, several European countries have announced new activity restrictions. Economists at Pantheon Macroeconomics cut US growth forecasts to 3% on an annualized basis in the first quarter, from 5%. They see most of this decline catch up in subsequent quarters.

Even though the impact of the virus on growth has abated, its impact on inflationary pressure appears to have reversed from falling to rising. Covid-19 has prompted consumers to spend less on in-person services such as amusement parks and more on durable goods such as appliances and furniture. Closed factories and ports in China have made it more difficult for imports to get to the United States, and fear of getting sick has kept people from leaving their homes, resulting in a labor shortage and salary increase. About 3.2 million adults said in early September – when the Delta Wave was at its peak – that they were not working because they were afraid of getting sick, according to census data. It was against 2.8 million before the wave.


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Goldman Sachs economists on Friday raised their forecast for core inflation to 3.4% in June 2022, from 3.25% due to the prospect of Omicron-related plant closures in Asia and a rise real estate inflation.

Consumer prices in the United States rose 6.8% in November from a year earlier, the biggest jump in nearly four decades. In response, Fed officials said they would likely end their bond-buying stimulus program in March of next year and forecast interest rate hikes of three-quarters of a point. percentage by the end of 2022.

Increasingly, Federal Reserve officials fear the new Omicron variant will put further upward pressure on inflation.

Fed Governor Christopher Waller said on Friday: “We… don’t know if Omicron will exacerbate labor and asset shortages and add inflationary pressure.

The change in the mentality of those in charge has started a few months ago. Mr Powell told Congress in November that fears surrounding Omicron “could reduce people’s willingness to work in person, slowing progress in the job market and intensifying supply chain disruptions.”

If so, it could cause the Fed to hike rates faster than expected, said Robert Dent, senior US economist at Nomura Securities, who expects four rate hikes next year.

“They now know that this is an inflationary phenomenon and that inflation was already on the rise before Omicron, so it reinforces this tendency to be hawkish,” he said.

In the UK, where Omicron has pushed new daily cases to record levels, Prime Minister Boris Johnson’s government has introduced rules that require proof of vaccination for entry into nightclubs and certain other places, although that these restrictions be lighter than those of some previous outbreaks. . But the Bank of England, responding to high inflation, raised a key rate last week for the first time since the start of the pandemic.

“Experience since March 2020 suggests that successive waves of Covid appear to have had less of an impact on GDP, although there is uncertainty as to the extent to which this will turn out to be the case on this occasion.” , said policy makers.

The Bank of England had previously assumed that the decline in Covid-19 infections would ease the upward pressure on the prices of goods by rebalancing consumer spending towards services. With the resurgence of social distancing, “this rebalancing was now more likely to be delayed and therefore global pricing pressures could persist longer,” said the bank’s meeting minutes. “China’s current zero Covid strategy could cause further disruption to Chinese factories and ports and could affect shipping costs,” the minutes added.

On the other hand, aggregate demand, especially for services, could slow, according to the minutes, leaving the net impact on inflation uncertain.

The European Central Bank also estimates that the impact of the new variant will probably be much less severe than in the first wave. On Thursday, he announced the end of a bond buying program – the Pandemic Emergency Purchase Program – which aimed to offset some of the negative economic consequences of Covid-19.

But ECB President Christine Lagarde told reporters after the meeting that she was closely monitoring Omicron’s impact on the offer.

“The balance between the inflationary or deflationary impact that Omicron will have is still totally uncertain,” she said.

Write to David Harrison at [email protected] and Paul Hannon at [email protected]

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