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Prolonged inflation dampens US confidence, says Nobel-winning economist

Central banks face the unenviable task of trying to contain decades-old inflation without triggering severe recessions that could wreak havoc across the world. But Robert Shiller, an economist at Yale University and winner of the 2013 Nobel Prize in Economics, thinks they have no choice but to stay in line.

“If we see protracted inflation now, it will be a disgrace to this country and it will further diminish trust in institutions,” Shiller told reporters. CNN Business in an exclusive interview.

Shiller helped develop the leading measure of home prices in the US and popularized a key method for valuing stocks. His most recent book, however, looks at how the stories we tell ourselves as a society can shape our economic future.

It’s a big reason why inflation is seen as a threat. If people think prices will continue to rise at a rapid pace, they will start demanding higher wages. That will drive companies to raise prices even further to protect their margins, fueling a cycle that could become increasingly difficult to control, he says.

Since the latest report showing annual consumer inflation in the United States is stubbornly high at 8.3%, bets have risen on Wall Street that the Federal Reserve could raise interest rates. by a percentage point for the first time in its modern history.

Shiller thinks a rally of this size may be necessary, given the magnitude of the problem the Fed is facing.

Check out the main parts of the interview:

US house prices are rising at a slower pace but are still rising sharply. Do you think it’s fair to say that the market is cooling off?

I think yes. It’s hard to predict these things, but this was a remarkable run that we’ve seen in home prices since the bottom in 2012 – over 10 years. It cannot go on forever.

It was driven by expectations, self-fulfilling prophecies. People think they are going up and therefore expect that they have to be paid the highest amount. This has continued, even with the Covid-19 epidemic.

Are we seeing the beginning of a healthy correction or could it be more serious?

There may be a drop in prices, of course. I expect there will be at least a modest decline in real home prices adjusted for inflation. But it’s not something that needs to happen quickly.

Should the Federal Reserve be concerned about the housing market?

I think the inflation rate is a matter of trust. We don’t index everything to inflation because we think we have a monetary authority that will keep it from getting out of hand. If we see prolonged inflation now, it will be a disgrace to this country and it will further diminish trust in institutions. This is bad for the economy. It’s bad for all of us, a loss of confidence.

Are you concerned that we are entering a prolonged period of higher inflation?

To get people’s attention, to change their inflation expectations, you would have to raise interest rates to a high level, to get a sudden correction. So I don’t think inflation will fall back to 2% in one year. It’s not a good idea to be so aggressive.

The next Federal Reserve meeting, the last time I got a feel for the consensus, could raise a percentage point. That’s pretty big by historical standards, but it’s not the super drastic changes that would bring inflation down to 2% right away.

So do you think the Fed might need to work even harder to change expectations at this point?

I think a percentage point is a good number, because people don’t expect the Fed to go beyond that. And if they go beyond that, it would be more dampening of the will to spend than we thought possible.

I would stay within the framework they established of responding gradually. One percent seems to be right. I don’t have any science to say this, but it seems the public will take this step as confirmation of their belief that the Fed is acting against inflation, but it’s not so dramatic that it upsets the balance in our economy.

Source: CNN Brasil

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