Managing stagflation


Fernando González Urbaneja | Of recent statements by economic policymakers, I find the Federal Reserve Chairman’s statement at the Jackson Hole retreat revealing. Powell says that they are groping along. And yet the flight is reasonably on track and may land safely.

Central bankers, who are as much a determinant of the economy as governments, work towards a goal of general equilibrium, a control of prices (the optimal goal) without causing recession, let alone depression. No one fears the latter, but only the former, recession, which a few months ago was estimated to be foreseeable for the European economies at this stage of the year, led by Germany, which is suffering the most from the decline in world trade that is damaging its exports.

There is no recession, although average European growth this year (and probably next) is modest, below 2% and in some countries closer to 0% than 1%. There is no growth, even though prices are hardly falling beyond what energy costs will tolerate. And economists call a phase of rising prices with no growth stagflation.

Central bank economists and their bosses warn that inflation is still above the central target and are against changing that target from 2 to 3%, which would justify putting an end to rate hikes and moving to a strategy of tolerance and complicity with growth. They are not going down that road, they are maintaining the low inflation target without driving the economy into recession. This is called fine-tuning, which would require some contribution from fiscal policy (which is the responsibility of governments) to contribute to growth without incurring excessive deficits.

It is a balancing act that rests on the credibility of the monetary authorities and economic leaders. The United States is managing the situation better because it does not carry the burden of energy costs; Europe has more constraints, but is doing better than many predicted a few months ago.

Managing stagflation is now the challenge for central bankers and policymakers. To begin with, to explain it well and generate confidence, and then to take the least bad decisions, those that encourage economic agents to hold on and bet on a future of growth.

About the Author

Fernando Gonzalez Urbaneja
Over 30 years working in economic journalism. Fernando was founder and chief-editor at El País, general editor at the business daily Cinco Días, and now teaches at Universidad Carlos III. He's been president of the Madrid Press Association and the Spanish Federation of Press Associations. He's also member of the Spanish press complaints commission.