The Inflation Struggle Is Over. Just Don’t Tell Anyone

Even with inflation well and truly on the way down after the most aggressive interest-rate tightening in a generation, central banks are averse to declarations of victory. That the pace of price increases has been reined in without a major economic downturn is an accomplishment that warrants some trumpeting.

While new forecasts from the International Monetary Fund came with the usual recommendation to crack down on debt and tut-tutting on the ills of protectionism, what really stands out is good grades for the conduct of monetary policy. In its eight decades, the world’s lender of last resort developed a reputation as a bit of a scold. So the praise contained in the World Economic Outlook, which was released on Tuesday, is noteworthy. “The decline in inflation without a global recession is a major achievement,” Chief Economist Pierre-Olivier Gourinchas wrote in a blog post.

There are signs that policymakers are absorbing the message, even if they don't shout about it. Rate cuts have been forthcoming not just from some of the most powerful authorities, such as the Federal Reserve, the European Central Bank, and the Bank of England. The cost of money has come down in South Korea, Indonesia, New Zealand, and the Philippines. The Bank of Thailand, which had resisted pressure to act despite inflation being below its target, acquiesced last week. Governor Sethaput Suthiwartnarueput was at pains to say investors shouldn't read too much into that reduction; he preferred to call it a “recalibration.” These steps have all been accompanied by sobering remarks about being ready to halt if prices start going the wrong way. This rhetoric is best interpreted as a hangover from late 2021 and 2022 when officials were attacked for being tardy, not as a statement of serious intent. 

Is inflation really yesterday's story? Developments have been very encouraging. In a number of countries, it has recently moved back to target — or begun to undershoot. The trend is clear: The IMF predicts global headline price gains will slip to 3.5% by the end of next year, compared with 9.4% in the third quarter of 2022. To put that projection into perspective, that's a touch below the average of the two decades prior to the pandemic. Remember that was the era when policymakers fretted about inflation being too low, and spent a lot of time thinking about how to crank it up. 

With the battle won, the monetary authorities that have refused to budge yet are looking isolated. The Reserve Bank of Australia's mantra of “not ruling anything in or out” was a neat formula, especially early in the year when inflation numbers looked a bit ambiguous. The language also had a public-relations role: Governor Michele Bullock could distance herself from her predecessor, Philip Lowe. 

Bullock's line has outlived its usefulness, especially when she has conceded that hikes haven't been on the table lately. Something has been, in effect, ruled out. Inflation is retreating: Consumer prices climbed 2.7% in August from a year earlier, the first time since August 2021 that they have been within the bank's 2%-3% goal. The RBA needs a better way to describe its stance than nothing-to-see-here-folks.

You would be forgiven for missing this good news. After all, most of the headlines from the IMF were about a reduction in growth forecasts. While technically accurate, this terminology obscures a broader point. The expansion will likely be 3.2% in 2025, the same as this year. It's a mere 0.1 percentage point slower than the prior projection. This is a positive outcome given the anticipated costs of quashing inflation. Despite China's travails, the global picture isn't too shabby. A boost to US numbers is compensating for some softness in China. 

Patting the IMF on the back is almost as popular as singing the praises of central banks. Neither is perfect. The IMF for too long was always about lectures on the virtues of economic orthodoxy. Nations getting emergency loans are usually subject to strict conditions and were often forced to surrender some control of their domestic agenda. The infamous 1998 photo of IMF Managing Director Michel Camdessus standing over then Indonesian leader Suharto forcing him to sign an agreement was one for the ages. If there is one image from the IMF's history that the fund probably wishes it could erase, that would be it. It reeked of colonialism.

Arguments about the pace of rate cuts notwithstanding, the big picture is clear. It's not merely a battle that's been won. The war is probably behind us as well. Just don't say it too loudly. People might get the wrong idea.