Despite the very loose fiscal and monetary policy, the outlook for inflation for the year ahead is still broadly benign, says Montreal-based BCA Research in a new report.
The independent research firm notes that while, policy settingsaround the worldlook very inflationary with large fiscal deficits and aggressively easy monetary policies, “it is hard to see inflation gaining any traction when global activity is so weak and the monetary transmission process is impaired in many countries.”
BCA reports that global traded goods prices are falling, wages are only growing very slowly in the major economies, and monetary growth is moderate. “There is more of a deflationary than inflationary tone to the economic environment and it does not look as if this will change any time soon,” it says, adding that inflation will likely remain tame in 2013.
Nevertheless, it also suggests that policymakers are still on guard against inflation. “Central bankers have definitely softened their attitude to inflation and are prepared to take risks in the direction of higher prices in order to ensure a faster pace of growth,” the firm allows. However, it maintains that once economic growth gains sounder footing, “policymakers’ attitudes will harden.”
“In other words, faster economic growth is a pre-condition for a sustained major inflation problem, but an improved economy will trigger a tightening in policy,” it concludes. “It would be a mistake to think that the current generation of central bankers believes that sustained high inflation would be a desirable solution to current debt levels.”