A new chapter

Central banks should forget about inflation

Inflation is under excellent control in developed economies. The leaders of the world's central banks should not waste much time talking about it this weekend at their annual symposium in Jackson Hole, Wyoming.

The monetary authorities have mostly been focussing on inflation since the 1970s, when there were wage-price spirals and double-digit rates. For many of them, inflation control is at the centre of their legal mandate. But uncontrolled inflation has not been an issue for almost three decades. Current fears of deflation are vastly exaggerated. No large country has had to deal with significant and sustained price declines since the 1930s.

Investors worry about miniscule changes in reported inflation measures, but stability is the best word to describe price patterns in the United States, the euro zone, Japan and the UK. National rates are not identical, of course. However, the debilitating effects of severe price instability are absent, whether prices are falling at less than a one per cent annual rate (as in Spain) or rising by three per cent a year (as in Australia).

There is no clear explanation of why inflation has settled down, so no one can predict with confidence that consumer prices will not eventually become a problem again. However, for now, central bankers have more important topics to discuss.

To start, there are weak labour markets, this year's official topic, although monetary policy probably can't do much more to help. More pertinent to the group's expertise, the global financial system looks fragile.

True, their current tools cannot do much to deal with today's leading financial problem, excessively high levels of debt. But they could use their elevated positions to help start the necessary serious conversations about speeding the process of deleveraging, not sneakily through inflation but directly through debt write-downs and monetisation.

If talk about debt levels flags, the symposium's location could inspire talk about the mountains of potentially destabilising foreign currency reserves around the world. And there is much more to be said about the tricky path forward: how to increase policy interest rates without creating another financial shock. Inflation worries are no more than a diversion.