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Inflation may look like a problem that will go away, but is more likely to persist and lead to a crisis in the years ahead, according to a warning from Deutsche Bank economists.

Deutsche issued a dire warning that focusing on stimulus while dismissing inflation fears will prove to be a mistake if not in the near term then in 2023 and beyond…

The firm contends that the Fed’s intention not to tighten policy until inflation shows a sustained rise will have dire impacts.

“The consequence of delay will be greater disruption of economic and financial activity than would be otherwise be the case when the Fed does finally act,” Deutsche’s chief economist, David Folkerts-Landau, and others wrote. “In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets”…

In the meantime, indicators such as the consumer price and personal consumption expenditures price indices are well above the Fed’s 2% inflation goal. Policymakers say the current rise in inflation is temporary and will abate once supply disruptions and base effects from the early months of the coronavirus pandemic crisis wear off.

The Deutsche team disagrees, saying that aggressive stimulus and fundamental economic changes will present inflation ahead that the Fed will be ill-prepared to address…[a] position not widely held by economists.

The Deutsche team said the coming inflation could resemble the 1970s experience…

Soaring food and energy prices along with the end of price controls helped push that era’s soaring inflation.

Then-Fed Chairman Paul Volcker led the effort to squash inflation then, but needed to use dramatic interest rate hikes that triggered a recession. The Deutsche team worries that such a scenario could play out again.

Original post from CNBC

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