Rent caps and price controls won’t stop inflation but if central banks act too early by raising interest rates to contain prices rises, they’ll risk triggering a recession, economists from University College Dublin (UCD) and University College Cork (UCC) told the Oireachtas Budgetary Oversight Committee.
Inflation has raced to the top of domestic and international policy agendas. New data on Wednesday showed the US suffered its biggest inflation spike in 31 years in October. The news piled pressure on policy makers to find ways to tackle spiralling costs that are threatening to strangle economic recovery.
In Germany a council of economic advisors to Angela Merkel’s outgoing government stopped short on Wednesday of calling for higher rates but called on the European Central Bank (ECB) to publish a strategy for ending its super loose monetary policy in light of the building inflation risks.
The influential four-member German Council of Economic Experts expects inflation in the euro area’s largest economy to average 3.1pc in 2021 and 2.6pc in 2022. That’s well above the 2pc ECB target.
Short term supply-chain logjams and a squeeze on fuel prices could turn temporary factors into lasting higher rates of inflation, the Germany economists warned. They want the ECB to “communicate a normalisation strategy soon”.
“Increasing inflation risks and the growing dependence of public finances on low interest rates in some member states could become a dilemma for monetary policy,” they said.
At the Budgetary Oversight Committee on Wednesday UCD’s Karl Whelan warned of a possible recession if central bankers act too early.
But he said the ECB “won’t move very fast” to hike rates.
“I would suggest next summer would be the very earliest that we would see an actual interest rate increase,” he told the committee.
“Perhaps they can do that and avoid engineering a recession, but there’s plenty of historical examples of where central banks raised interest rates to squeeze inflation out of the system and recession was a by-product.”
He and UCC’s Ella Kavanagh both argued against price, wage and rent controls, saying they were largely ineffective in controlling inflation.
In the US, consumer prices accelerated in October as Americans paid more for energy and food and there are growing signs inflation could stay uncomfortably high well into 2022 with pressures are also brewing in the labour market, where an acute shortage of workers is driving wages higher but inflation is eroding those wage gains.