Central banks are waiting for something to happen. But, what?

In Europe, "The fear is that high inflation now, even if temporary, will prompt firms to boost wages, perpetuating inflation by increasing demand," Reuters. But, that has not happened despite an inflation rate of 4.1%. "Most wage deals in Germany, arguably the bloc's strongest labour market, so far appear to be in the 1.5% to 2.5% range, economists say." Probably because, "The labour market has also yet to recover from the pandemic." In the US, "Last spring, (US President Joe) Biden's advisers made a forecasting error (on inflation) that helped turn their fears into reality. Administration officials overestimated how quickly Americans would start spending money in restaurants and theme parks, and they underestimated how many people wanted to order new cars and couches," Japan News. "Instead, the emergence of the delta variant of the virus over the summer and fall slowed the return to normalcy. Americans stayed at home, where they continued to buy goods online, straining global supply chains and sending the price of almost everything in the economy skyward." "The annual rate of inflation in the United States hit 6.2%, the highest in more than three decades, as measured by the Consumer Price Index," Pew Research Center. Russell Investments' quarterly survey of investors "found 55% of fund managers expected US inflation at between 2.26% and 2.75% over the next 12 months, well above the Federal Reserve's 2% inflation target. A full 20% expected inflation to move even higher," Reuters. "President Biden...conceded that inflation is at a three-decade high because 'people have more money now' as a result of his $1.9 trillion COVID-19 stimulus legislation, recognizing a central point made by people who are arguing against a nearly $2 trillion sequel," NY Post. Biden nominated Federal Reserve Chair Jerome Powell. who implemented an "unprecedented monetary stimulus" during the pandemic, for a second four-year term, CNBC. In August 2020, Powell announced a "robust updating" of the Fed's policy on interest rate and from now, the Fed will resort to "average inflation targeting", tolerating a period higher prices to make up for a period of low prices, CNBC. Higher inflation helps to shrink the "mountain of debt weighing down the US economy", Bloomberg. "Raising the long- term inflation target from the current 2% to a still-modest 4% would substantially increase the rate at which debt effectively vanishes." Economists Joshua Aizenman and Nancy Marion wrote, "The average inflation rate over this period [from 1946 to 1955] was 4.2%....inflation reduced the 1946 [federal] debt/GDP ratio by 40% within a decade." For us, "India's inflation has stayed high even when demand hasn't recovered. That means more inflation when it does," wrote Udit Misra. A higher interest rate by the US Fed will mean, "One, Indian firms trying to raise money outside India will find it costlier to do so. Two, the RBI will have to align its monetary policy at home by raising interest rates domestically." The problem is, "If money supply is tightened in the US, capital which would be otherwise be destined for India, would get routed to the US. There will be increased demand for the dollar and the rupee, like other currencies, will depreciate," FE. A weaker rupee will raise the cost of imports and add to inflation. Foreign investors have sold Indian equities worth Rs 150 billion in the last four sessions because Indian shares are too expensive, inflation is too high and the RBI seems unconcerned, said Arvind Sanger. The RBI is frozen. Like a rabbit in headlights?