Commentary on Political Economy

Wednesday 6 April 2022

Inflationary forces spell long-term trouble for central banks, warns BIS head 
Global supply chains and other factors that have kept prices low are being weakened, says Agustín Carstens 

 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.

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