The supervisory authorities of the National Bank of Serbia issued an analysis of the survey on inflationary expectations. The report is from August 19 and represents the opinion of the financial sector in the country.
According to the IPSOS and Bloomberg survey, relative price stabilization awaits us in the next 12 months. In this period, forecasts say, inflation will be around 6%. Both polls came up with similar results. This is good news because in the same breath, forecasts for 2 and 3 years were given, which are respectively 4% and 3,5% on an annual basis.
On the other hand, the news about inflation trends from various parts of the world is not positive. So Goldman Sachs warns that Great Britain could face inflation of as much as 22% in the next year. The pressure on energy prices is historic and some households will receive bills up to 80% higher than last winter. The bank also predicts a drop in GDP of 3,4%, which combined with inflation is a perfect example of stagnation.
Germany announced a few days ago inflation of 8,8% from August 2021, which is the highest level in the last 40 years. The European Central Bank is under pressure to raise its benchmark interest rate in response to rising inflation. For now, their moves are slow because they are trying to keep interest rates low and thus boost the economy and the people. Unfortunately, as the famous Milton Friedman said a long time ago: "There is no free lunch." He said this in the context of government spending and money printing. In the clinch with the Ukrainian war, and rising food and energy prices, the only way to fight is to increase interest rates, which will put the real interest (interest after inflation costs) on a positive footing.
This move is always politically unpopular because it affects the level of investment. With each percentage point rise in interest rates, each investment is less profitable because bonds yield more. Why would anyone invest in, for example, a restaurant, if German government bonds provide the same return. There is no construction, no waiters, cooks, inspections and other operational hassles. The interest just goes down without you getting out of bed. And all this is guaranteed by the German state.
The slower the ECB decides to take this difficult step, the deeper and longer the crisis will be. Other EU countries are faced with similar problems, so a significant number of people are threatened by an uncertain economic future. The problem of today's generation of financial experts is that they have not faced such financial flows in their career. The last time the world was faced with such price pressures and stagflation was during the 70s of the last century.
And then the initiator of the beginning of the price increase was the war. In 1973, Egypt and Syria suddenly attacked Israel in a war known to history as the Yom Kippur conflict. As soon as America sided with the Jews, Saudi Arabia and other oil exporters retaliated by cutting production of the black gold, and plunged the world into an inflationary spiral. The hardships lasted for a whole decade when companies raised wages to meet the cost of living, prices continued to jump, investments became a mental noun, and the real standard of living was in constant decline.
Today, the political situation is a copy of the crisis that economists know as the Great Inflation. The war is raging, energy supplies are scarce and prices are soaring. The only remedy is to raise reference interest rates. NBS almost raised the rate by 0,25% to 3% per annum. As I have emphasized several times - this is not enough. We must react more aggressively in order to curb inflation and increase the rate to 5% as soon as possible. The move, like any right one, is politically unpopular because money will be more expensive for the economy and citizens. That is why it is necessary for monetary policy to be divorced from politics, because the fastest way to economic ruin is the politicization of monetary policy. After all, remember 1992, Slobica and the fantastic inflation of 19,755%.
The author is an economist; he also studied philosophy at DePauw University in the USA; he is currently an investor in several industries
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