Rising Inflation Rates Alarms Deutsche Bank Economists

Economists from Deutsche Bank have issued a dire warning regarding growing inflation rates. If the increase in inflation persists, it could likely prompt a global economic and financial crisis to ensue in the wake of the pandemic.

Deutsche has considered this a cause for alarm, especially as countries continue to focus their efforts on providing stimulus while entirely neglecting skyrocketing inflation. Effects could manifest either within the immediate future or well beyond the current crisis.

The economists are specifically highlighting the U.S. Federal Reserve’s new framework, which is geared to tolerate higher inflation in hopes of accommodating a more inclusive recovery.

“The consequence of delay will be greater disruption of economic and financial activity than would otherwise be the case when the Fed does finally act,” said David Folkerts-Landau, chief economist at Deutsche. “In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets.”

On the other hand, policymakers believe that the current rise in inflation is only temporary and will wear off along with the exit of the pandemic. Additionally, people on Wall Street share the same sentiments of inflation pressures being transitory.

The economists at Deutsche project that the coming inflation might be similar to how it was during the 1970s when rates averaged 7%, easily entering into the double digits at certain points. This was suppressed when substantial interest hikes were implemented, leading to a recession.

“Already, many sources of rising prices are filtering through into the US economy. Even if they are transitory on paper, they may feed into expectations just as they did in the 1970s,” explained Deutsche Bank’s team. “The risk then is that even if they are only embedded for a few months they may be difficult to contain, especially with stimulus so high.”

Source: CNBC