The world’s recent experience of faster inflation may make it harder for central banks to control prices in future, former US Federal Reserve Chair Ben Bernanke said.
Responding to a question at a conference in Wellington on Thursday, Bernanke said there was no doubt that the inflation spike following the Covid-19 pandemic will affect behavior.
“I think in some ways the inflation (surge) has made inflation control a little harder going forward because, you know, firms will maybe find it easier to raise prices, you may see less consumer resistance, people might become more sensitive to inflation and their expectations may adjust,” he said.
At the same time, Bernanke suggested that central bankers might become more wary of allowing prices to surge again. He cited studies showing that Fed policymakers who were adults in the 1970s, when the economy was shaken by oil-price shocks, were “more hawkish in general” than younger people.
“Your grandmother who lived in the depression would never spend money on some luxury item, right? Always very big on saving,” he said. “So people’s behavior is certainly affected by their experience. The Germans still remember the hyperinflation of 1923 for god’s sake.”
It is unclear how much of an issue this will become, Bernanke said.
“It may not be a major, we don’t know,” he said. Still, “what actually happened was such a shock to many people and they didn’t understand that this could happen. Those things can be relevant to policy.”
Communication
Bernanke, who helmed the Fed from 2006 to 2014, was the keynote speaker on the first day of a conference on inflation targeting hosted by the Reserve Bank of New Zealand. The RBNZ’s governor, Adrian Orr, unexpectedly resigned yesterday.
In his prepared remarks, Bernanke said the key lesson to be learned from the recent bout of inflation was that central bank communication should put greater weight on the possibility that outcomes can be quite different from the most likely forecast and that, if the reality is different from the forecast, monetary policy will respond appropriately.
By way of example, he said in 2021 the Fed focused the public’s attention on its forecast that inflation would most likely prove to be transitory.
“When the inflation proved not to be transitory, it hurt the Fed’s credibility,” he said. “More seriously, the public was not well informed in advance about what the Fed’s response would be once the baseline forecast proved wrong.”
With hindsight, a better communications strategy might have been for the Fed to say that the baseline forecast envisioned transitory inflation but to emphasize more strongly that other outcomes were possible, and if they occurred, to outline in general terms the way that policymakers would expect to respond.
The same strategy could have been used to illustrate in advance the conditions under which quantitative easing would be ended at about the same time, Bernanke said.
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