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IT May Cap Inflation, Affect Monetary Policy
World Economy

IT May Cap Inflation, Affect Monetary Policy

Advances in information technology and growing flexibility in the labor market in recent years could naturally cap inflation, potentially affecting monetary policy, European Central Bank executive board member, Yves Mersch, said on Monday.

The comments highlight concern at the ECB that consumer prices and wage-setting behavior may have changed fundamentally since the global financial crisis, making ECB policy less effective in raising price growth back to the bank’s target of close to but below 2%, Reuters reported.

Even with unemployment falling faster than predicted and the eurozone economy growing for the 17th straight quarter, wage pressures are muted and inflation is barely above 1%. It is likely to miss the ECB’s target at least through 2019 even with unprecedented policy accommodation.

“Improvements in logistics have permitted the growth of global value chains, and e-commerce has revolutionized the transparency of pricing within and across countries,” Mersch said in Kuala Lumpur.

“These technological advances can affect how domestic inflation reacts to shocks, the pass-through of exchange rate movements into inflation and the domestic impact of global developments and inflation,” Mersch added.

Those changes could reduce the impact of accelerating growth on inflation and may flatten the so-called Phillips curve, which tracks the relationship between employment and inflation, assuming that price growth accelerates as the labor market tightens.

“In the labor market the internet allows for more services being offered with less intermediation at lower prices,” Mersch added.

The changes in employment could mean that inflation starts to accelerate at a lower unemployment rate than in the past, affecting the relationship between employment and wage growth, and ultimately influencing monetary policy, Mersch added.

Still, Mersch argued that unconventional monetary policy tools used since the global financial crisis are unlikely to remain necessary as the global economy and central banking normalize.

“Forward guidance, asset purchases, negative nominal interest rates and lending schemes that incentivize banks to increase lending, such as the targeted longer-term refinancing operations, were all designed to combat the challenges of the period,” Mersch said.

“But as conditions normalize, it is unlikely that these policies will remain necessary.”

 

 

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