Inflation: how much is too much?

Inflation: how much is too much?

The last few years have seen central banks using monetary policy to fight deflation and grow the economy. Over the next few years, the risk of those banks overshooting their inflation target rates is a very real possibility.

Here’s why central banks may welcome that outcome.

global inflation will accelerate gradually from the current very low levels toward central bank targets of around 2% over the next few years, with the US economy leading the way.
While there is always two-way risk around the base case, we think inflation is more likely to surprise to the upside, overshooting central bank targets. This is a very real possibility over the secular horizon in the US, less so in Europe or Japan. Note that the Federal Reserve, with its massive balance sheet and its extraordinary monetary policies, still has not generated sufficient inflation. But as the economy has healed and the amount of slack has reduced, we might see the old definition of inflation reappear: too much money chasing too few goods. Frankly, many central banks would probably welcome a modest overshoot.
We don’t think the downside risk—deflation—is likely in the next several years. Back when the economy was just coming out of the global financial crisis, we were constantly flirting with the possibility of deflation. A combination of lack of global aggregate demand as well as the correction in commodity prices (too much supply) contributed to this. Unprecedented policy actions by major central banks, including the Fed, the European Central Bank and the Bank of Japan, have largely contributed to this diminished likelihood of deflation. While we are calling for a modest overshoot of the Fed’s 2% target, not runaway

http://qz.com/443232/inflation-outlook-approaching-target/

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