Central banks have been trying to curb inflation for some time. The Fed wants to be back at an inflation rate of 2 percent per year by the end of 2024. Macro-economist Edin Mujagic believes that the bank must be prepared to pay a higher price for this. ‘Unemployment has to rise a lot faster to achieve that.’
Unemployment
‘You could very quickly get the impression that everything is going as it should, but that is not the case,’ says the macro economist. The United States is currently heading towards 4.6 percent unemployment. According to Mujagic, calculations by the central bank in the American city of Cleveland show that unemployment must rise to 7.4 percent to reach the desired inflation level of 2 percent.
“That is a doubling of the current unemployment rate, and doubling it without a recession is difficult,” says Mujagic. “What the calculations say is that if unemployment is to stay around 4.5 percent, hopes that inflation will fall to 2 percent must be dashed.”
Difficult situation
According to the macro economist, the Fed is in a situation that is more difficult than before. The Fed is now facing an environment they have not faced before. Particularly because of the high debts, you don’t know how households, companies and governments will react to interest rates that have been pushed too far,’ explains Mujagic.
“Inflation is an enemy we already know. ‘
The Fed must therefore make choices, according to the macro economist. “But the Fed needs to realize that they can’t raise interest rates too low and then hope it won’t have a detrimental effect on the economy,” Mujagic warns. The macroeconomist thinks the Fed will choose to let inflation rise, because it is “an enemy we know.”
Europe
In Europe, the ECB faces the same choice to some extent. If I listen to what the ECB says about the future, we are going to inflation of 3.5 percent. So I think there is a good chance that the decade we’ve entered will be a kind of inflation decade,” Mujagic said. According to the macro economist, these are not frightening percentages, but an inflation of between 3 and 5 percent per year. ‘That’s double what we’ve been used to over the past thirty years.’
Mujagic does not think that the problem can be solved by raising wages: ‘Every company will be confronted with higher wage costs and will then pass them on. Then it will be even higher.’ According to the macro economist, the cure for inflation lies elsewhere, namely in making borrowing money more expensive. “Much more expensive than what the Fed and ECB want now.
