TOKYO (Reuters) - Inflation is rising globally because of an easy monetary policy, especially in the United States, leading economist and former U.S. Under Secretary of Treasury for International Affairs John Taylor said on Wednesday.
To tackle rising inflation, Taylor urged the world’s policy-makers to talk about adopting a global inflation target.
The creator of the so-called “Taylor rule” of monetary policy, which stipulates that interest rates should rise by more than the increase in inflation after smoothing out temporary price changes, Taylor said U.S. interest rates are now below appropriate levels indicated by the rule.
“During the past year, as global inflation has risen, global short term interest rate targets set by central banks have not increased on average by as much as inflation,” Taylor said in a conference on monetary policy hosted by the Bank of Japan.
The average targets have in fact declined since the credit market crisis started in the middle of last year, largely due to sharp rate cuts by the Federal Reserve, said Taylor, now an economics professor at Stanford University.
When interest rates are declining abroad, for example in the United States, other central banks have tended to be reluctant to raise rates because that could lead to a sharp appreciation of their own currency, he said.
“Because of concerns about exchange rates and the impact on the exports sector, on the economy in general, central banks are not following the principles that they come to think of as important,” Taylor said.
That leads to higher commodity prices, driving inflation all around the globe, he said.
“There is strong evidence that at least part of the increase in energy and commodity prices is related to the global inflationary pressures and thereby, in part, to the policy response to the financial crisis in the United States,” he said.
The global dimension of current inflation means a global response is necessary.
“A good place to start is with discussions about some kind of global inflation target,” he said, adding that such a target does not need to be a strict numerical target.
Reporting by Hideyuki Sano