Central banks should ignore soaring energy costs: The Economist

The prestigious British magazine, The Economist, called on central banks around the world to ignore soaring energy costs resulting from the Russian military escalation in Ukraine.
It said that the escalation of events in Ukraine has caused European natural-gas prices almost to double and sent oil prices soaring to over $115 a barrel. That has added to the inflation problem facing the world’s central banks.
The media outlet added that western energy giants are getting out of Russia, while sanctions on Russian commodities exports are casting a shadow on global markets as well as the repercussions of the cancelling of the Nord Stream 2 gas pipeline from Russia to Germany. If Russian energy exports are cut off completely, the oil price could reach $150, rapidly boosting global consumer prices by another 2 percent, the newspaper noted.
The Economist said that rich-world central bankers should all but ignore supply shocks such as rising energy costs. That is because their direct effect on inflation is only temporary.
It added that when policymakers ignore this rule of thumb things usually go wrong. In 2008 and 2011 the European Central Bank (ECB) raised rates because of supply-side factors, and ended up worsening the Great Recession and its aftermath.
However, today’s shock comes as inflation is already too high, the newspaper stated, pointing out that central bankers are worried about prices taking on a momentum of their own. They may be reminded of the energy crisis in 1973, when the war between Egypt and the Israeli entity broke out in October 6, 1973 and led to an oil embargo and a spike in prices that made a bad inflation problem worse, The Economist added.
The British media house stressed that it is right to be alert to the danger of a repeat of the 1970s, but there is little central banks can do about expensive energy without unnecessarily crashing their
Thankfully, although the public’s expectations for inflation over the next year are up strongly, long-term expectations remain pretty stable, suggesting that it should be possible to follow the standard approach to this supply shock by overlooking energy prices, the paper said.
At the same time, policymakers must be wary of the opposite mistake as pricier energy will cause slower growth, especially in the parts of Europe that rely on Russian gas, the paper said. It may therefore be tempting to keep policy very loose, according to The Economist.

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