Global central banks already struggling to spur inflation amid the spreading coronavirus are facing a fresh challenge — the oil crash.
The price war between Saudi Arabia and Russia that has given crude its worst week since 2008 will put heavy downward pressure on inflation just as the coronavirus outbreak hits consumer spending. It’s undoing the years of effort that monetary authorities have put in, along with trillions of dollars of stimulus, trying to hit their price-stability targets.
The question now is whether they have the capacity to respond as strongly as needed. Market-based gauges of future inflation have slumped, suggesting that investors doubt they can, or that governments will provide sufficient support.
Central bankers tend to skirt over energy-price shocks if they think they’ll be temporary, pointing instead to “core” inflation measures that exclude volatile components. After so many years of low inflation despite massive monetary stimulus, though, there’s a risk that companies and households decide this is just the latest sign that prices will stay flat.
“There is a tendency to say oil is a temporary factor that central banks will look through, and won’t affect their view of the appropriate stance of policy,” said Jacob Nell, an economist at Morgan Stanley, who sees the oversupply of oil persisting. “It’s harder for central banks to look through a fall in inflation when inflation expectations are so far off the target.
They have to be more ready to respond, or they could risk credibility and it will be that much harder to get inflation back to target in future.”