It’s still possible that high demand pressure could draw more resources into the economy than previously thought and over time help contain price pressures.
During the pandemic, the central banks of the US and of the eurozone reformed their monetary policy strategy in a major break with earlier practice.
But they have not sustained the courage of their new convictions. Instead they let criticism bully them into rejecting the possibility that high demand pressure could draw more resources into the economy than previously thought and thus over time help contain price pressures while maintaining growth.
Yet it is only this year that nominal spending surpassed the pre-pandemic trend in the US; and it still has not done so in the UK or eurozone. Even in the US, the total volume of goods and services bought is right on the pre-pandemic trend. And while the US economy still employs almost a million fewer people than in February 2020, the current boom keeps adding jobs at rates more than twice the pre-pandemic average. Job growth remains strong in continental Europe too.
The same goes for the energy crisis. For net energy importing economies, high oil, gas and power prices make them poorer, so they will have to export more and consume less to provide for their energy needs.
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