Inflation Phobia, Myths and Dogma exacerbate Policy Responses Anis Chowdhury and Jomo Kwame Sundaram

Introduction

The world is once again in the grip of inflation, with Kenneth Rogoff (2022) terming this ‘The Age of Inflation.’ Pundits, such as Rogoff, and leading central banks – for example, the US Federal Reserve (Fed), the Bank of England (BoE) and the European Central Bank (ECB) – and international financial institutions – for example, the International Monetary Fund (IMF), the World Bank and the Bank for International Settlements (BIS) – are all loudly warning about the dire consequences of inflation.

Inflation hawks, like Frederic Mishkin (2022), believe central bank independence must be jealously protected to slay it. Larry Summers has urged the Fed ‘to keep tightening, even as “collision” looms’ (Anstey 2022). Lisa Cook of the Fed’s Board of Governors insists, ‘more rate hikes [are] needed to combat inflation’ (Rugaber 2022). Meanwhile, sequenced interest rate hikes by the Fed, BoE and ECB, followed by most other advanced countries’ central banks, have been driving the world economy to recession.¹

Higher interest rates have slowed the world economy and triggered capital outflows from developing countries, depreciating their currencies besides lowering export earnings. Together, these are causing devastating debt crises in many developing countries, as both Bretton Woods institutions (BWIs) – the IMF and the World Bank – warn.² However, policy advice from the BWIs has varied confusingly. By late 2022, both were urging stronger anti-inflationary measures, mainly by raising interest rates, arguing – without offering any convincing evidence – that not acting with immediate decisiveness would mean worse later.

As warned by the United Nations (UNCTAD 2022), such policy-induced world recession and prolonged stagnation are likely to inflict worse damage than the Global Financial Crisis (GFC) in 2008 and COVID-19 since 2020. For UNCTAD, believing central banks can bring down inflation with higher interest rates – without generating deep and prolonged recession – is an ‘imprudent gamble.’ Rising US interest rates and dollar appreciation are raising import costs, inflationary pressures, debt servicing and borrowing costs everywhere. These, in turn, are worsening fiscal balances, undermining economic recovery prospects (United Nations 2022).

This article offers an alternative narrative on current inflation, discussing its causes, consequences and policy responses. Policy responses to inflation have been driven by inflation phobia and myths due to neoliberal ideology and dogma, especially since the neo-classical counter-revolution against Keynesian macroeconomics. The obscure understanding of the nature and causes of inflation led to inappropriate policy responses that have exacerbated the crisis. The article begins by highlighting unfounded beliefs underlying the phobia. It debunks these myths associated with neoliberal ideology and dogma. It exposes misdiagnoses, policy confusion and anti-labour bias before offering an alternative narrative and concluding remarks.

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(This article was originally published in Elgaronline on April 14, 2023)