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Inflationary forces spell long-term trouble for central banks, warns BIS head

Rising pressure on prices is likely to keep inflation at its highest level for more than three decades in many countries and cause long-term problems for central banks, warned the head of the Bank for International Settlements.

Agustín Carstens, general manager of the BIS, the umbrella body for central banks, pointed to a “new inflationary era” amid signs that price expectations of consumers and businesses are becoming “unmoored” from their historically low levels.

Rising expectations are likely to feed further inflation as companies pass on higher costs to their customers and workers demand higher wages, Carstens said, citing an increased risk of “a dangerous wage-price spiral”.

“A generation of society, workers and business managers who had never seen meaningful inflation — at least in advanced economies — are learning that rapid price rises are not merely the stuff of history books,” Carstens said in a speech on Tuesday in Geneva.

“The structural factors that kept inflation low in recent decades may wane as globalisation retreats,” he added. “The pandemic, as well as changes in the geopolitical landscape, have already started to make firms rethink the risks involved in sprawling global value chains.”

Russia’s invasion of Ukraine has added to disruption in supply chains caused by the pandemic, triggering sharp price rises in food, energy and other commodities since the war began on February 24. “Such increases will feed directly into higher consumer prices,” he said. “Others, for example metals, will further stretch global value chains.”

He also said loose monetary policy and generous fiscal programmes helped to cause the latest “flare-up” in consumer prices, adding: “Policy settings, at least over the past year, may have served as a springboard for the rapid expansion.”

Consumer prices in the world’s 30 richest countries already rose at an annual rate of 7.7 per cent in February, up from only 1.7 per cent in the same month last year and the highest since December 1990, the latest OECD data showed on Tuesday.

Carstens said almost 60 per cent of advanced economies have inflation above 5 per cent — the highest proportion since the 1980s — while more than half of emerging market countries have inflation over 7 per cent — the most since a brief period during the 2008 global financial crisis.

“The forces behind high inflation could persist for some time,” said the BIS head. “Central banks will need to adjust, as some are already doing . . . No one wants to repeat the 1970s,” when advanced economies were hit by persistent high inflation.

Several of the world’s central banks have started raising interest rates to tackle inflation rates well above their 2 per cent targets, including in the US, UK, Canada, Brazil, South Korea, Mexico and South Africa.

Carstens said the “adjustment to higher interest rates will not be easy”, pointing out that households, companies, investors and governments have “become too used to low interest rates and accommodative financial conditions, also reflected in historically high levels of private and public debt”.

“It will be a challenge to engineer a transition to more normal levels and, in the process, set realistic expectations of what monetary policy can deliver,” he said. “Nor will the required shift in central bank behaviour be popular.”

Instead of relying on monetary and fiscal policy to prop up economic growth, Carstens called for “structural policies that strengthen the productive capacity of the economy”.

“Many of the economic challenges we face today stem from the neglect of supply-side policies over the past decade or more,” he said. “Central banks have done more than their part over the past decade. Now is the time for other policies to take the baton.”

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