Smart from Carmen Reinhart on inflation: Carmen M. Reinhart: Explaining Inflation Inertia: "Price-stability targets have proved elusive in countries like Argentina, where inflation is soaring, and Japan, which can't shake the specter of deflation.... The BOJ now holds about 50% of the outstanding stock of government bonds. This is no small achievement, as Japan’s government debt ratio, at 238% of GDP, is the highest in the world. And yet, despite these policies, inflation expectations five years out are still anchored close to 1%.... Argentina... inflation... has accelerate... to about 55%.... Pass-through from the exchange rate to the price level is only part of the story. And an overheated economy has played no role at all.... What can governments do to induce turning points in stubborn inflation expectations when central banks’ policies prove insufficient to the task?... Japan, convincing the private sector that higher inflation is the path of the future requires a break from the current practice of indexing public-sector wages to the previous year’s inflation. Bold increases in public-sector wages may provide the official signal.... As for Argentina... de-indexation requires significant reductions in real wages, starting with the public sector. The political difficulty of doing this (especially when the public sector is large, as it is in Argentina) is daunting...
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