The world’s major central bankers have acknowledged that inflation, which has skyrocketed in many advanced economies this year, could remain high for some time – and that while they still expect it to rise. As the pandemic-related supply disruptions subside, they are watching carefully to make sure that the strong price pressures do not become more permanent.
Jerome H. Powell, Chairman of the Federal Reserve, spoke on Wednesday at a panel alongside Christine Lagarde, President of the European Central Bank; Andrew Bailey, Governor of the Bank of England; and Haruhiko Kuroda, director of the Bank of Japan.
Mr Powell noted that while demand was strong in the United States, plant closures and shipping problems were dragging supply, weighing on the economy and pushing inflation above the target of the Fed by 2% on average.
“It is frustrating to recognize that getting people vaccinated and bringing Delta under control 18 months later remains the most important economic policy we have,” said Powell. “It’s also frustrating to see bottlenecks and supply chain issues not improving – in fact, at the margin, apparently getting a bit worse.”
“We see this probably continuing next year and maintaining inflation longer than we expected,” Powell said.
The Fed chairman’s comments were closely tied to those of Mr. Bailey and Ms. Lagarde, who also cited uncertainties over persistent supply chain bottlenecks as a risk.
“We’re back from the brink, but not completely out of the woods,” Ms. Lagarde said of the economic rebound. “We still have some uncertainty.”
She said supply chain disruptions were accelerating in some sectors, while increases in energy prices were an area to watch, as well as potential new waves of the coronavirus pandemic that could be resilient. vaccines.
“Monetary policy cannot resolve shocks on the supply side,” Bailey said. “What we need to do is focus on the potential side effects of these shortages.”
The joint appearance of some of the world’s most powerful economic leaders, sponsored by the European Central Bank, came during a turbulent week in financial markets. As stocks rebounded Wednesday morning, they fell sharply on Tuesday as government bond yields rose. Investors have been rocked by a political deadlock over the debt ceiling in the United States, problems with the heavily indebted real estate sector in China, the fact that global central banks are preparing to reduce their economic support and the possibility that recent rapid price gains can last.
Soaring inflation has swept across Europe and the United States this year as consumer demand skyrockets, but factory closures and shipping grunts are keeping many commodities in short supply. Central bankers have always maintained that these price increases will prove to be temporary. As businesses adjust to the post-pandemic recovery, they say, supply chain issues will subside. And while consumers have slashed their savings accumulated during the pandemic and inflated by government stimulus measures, these will not last forever.
But policymakers have increasingly recognized that while they expect the inflationary pop to be temporary, it could last longer than originally anticipated.
In the United States, consumer price inflation stood at 5.3% in August, and the Fed’s preferred inflation indicator – the personal consumption expenditure index, or PCE, has increased by 4.2% during the year to July. August PCE data is expected to be released on Friday.
Consumer prices are expected to peak “slightly above” 4% later this year in Britain, double the central bank’s target.
Elsewhere in Europe, inflation is also high, although the jump has not been as large. Eurozone inflation stood at 3% in August, the highest figure in about a decade. But price gains there are expected to slow more significantly over the next few years than in Britain and the United States.
Japan is a notable outlier among developed economies, with slow demand and near zero inflation. Low inflation leaves less room for central banks to help the economy in times of difficulty and can fuel a cycle of economic stagnation, making it a problem.
Central bankers in mainland Europe, Britain and America are wondering how to react to rising prices. If they overreact to temporarily high inflation with factors that will soon subside, they could unnecessarily slow down the labor market recovery – and could even doom themselves to a future of too low inflation, much like the situation facing Japan.
But if buyers expect constant inflation amid today’s explosion, they could demand higher wages, fueling a cycle of rising prices as companies try to cover rising costs. labor.
Monetary policy makers want to avoid such a situation, which could force them to raise interest rates sharply and trigger a severe economic downturn to dampen demand and control prices.
“There is a tension between our two goals: maximum jobs and price stability,” said Powell. “Inflation is high, well above target, and yet there appears to be slack in the labor market.”
“Managing this process over the next two years, I think, is the highest and most important priority, and it’s going to be very difficult,” he added.
For now, most of the world’s top officials are preaching patience, while gradually shifting their policies away from full-blown economic support. The Fed is preparing a plan to slow its large-scale bond purchases, which can allow money to flow through the financial system and reduce many types of borrowing costs, even if its key rate stays at most. low. The Bank of England has signaled that policy will need to be tightened soon, and the European Central Bank is slowing its own purchasing program during a pandemic.
“The historical record is replete with examples of failures,” said Powell, noting that economic policymakers tend to underestimate economic damage and under-support recoveries. “I think we avoided it this time.