[Bernanke's Warning] "Fed's Mistakes in Inflation Response" Rising Stagflation Concerns

[Asia Economy New York=Special Correspondent Joselgina] The background behind former Federal Reserve (Fed) Chairman Ben Bernanke, who led the Fed for eight years from 2006 and emerged as a savior during the global financial crisis, mentioning the possibility of stagflation on the 16th (local time) is the judgment that inflation in major countries including the United States has become that serious recently. It is pointed out that the Fed and central banks of various countries have already missed the timing to respond to inflation. Uncertainties surrounding the global economy, such as soaring inflation and monetary tightening in major countries to the highest levels in decades, the prolonged Ukraine war, China's economic slowdown, and the resurgence of COVID-19, have also increased more than ever.

When asked when the Fed's response to inflation should have started, former Chairman Bernanke called it a "complex issue" but pointed out, "The problem is why their (Fed's) response was delayed." In particular, looking back, he mentioned that it was a ‘mistake’ and added, "They would also agree that it was a mistake."

Recently, inflation in the United States has remained at the highest level in over 40 years. The consumer price index (CPI) increase rate in March reached as high as 8.5%. In April, it recorded 8.3%. Moody's Analytics analyzed that "U.S. households are spending about $341 more per month compared to the same month last year." Ahead of the midterm elections in November, the perception that inflation is the biggest problem is spreading. According to a survey by market research firm Pew Research, 70% of respondents cited inflation as the biggest issue in the United States.

This is not just a problem for the United States. Countries around the world are suffering from inflation. The Eurozone, hit directly by the Ukraine war, recorded inflation in the 7% range. Last month, South Korea's consumer price index rose by 4.5%, marking the highest level in 162 months since the 2008 global financial crisis.

Concerns about stagflation inevitably become a nightmare scenario for central banks tasked with the critical mission of price stability. Attempting to lower inflation could inadvertently dampen economic recovery.

On the day he warned about the possibility of stagflation, former Chairman Bernanke pointed out, "The more the Fed tightens monetary policy to reduce inflation, the greater and more severe the possibility of a recession becomes." Moreover, recent inflation is increasingly analyzed as being linked to areas beyond the Fed's control, such as supply chains and raw material prices. Currently, economists are also concerned that once hyperinflation occurs, it takes a considerable amount of time to normalize. In the past, former Fed Chairman Paul Volcker also failed to prevent a double-dip recession while curbing inflation through monetary tightening.

Some signs of stagflation have already been confirmed. The U.S. GDP contracted in the first quarter. Goldman Sachs recently lowered its GDP growth forecasts for the U.S. to 2.4% this year and 1.6% next year, reflecting the slowdown in consumer spending. Chairman Powell has also recently stepped back from the possibility of a soft landing that controls inflation without a recession. Elon Musk, CEO of Tesla, the largest U.S. electric vehicle company and the world's richest person, also mentioned the possibility of a U.S. recession on the same day. At an event held in Miami, Musk said, "A difficult time is coming," adding, "The recession could last one year or up to 18 months."

Along with this, concerns about a hard landing in China due to COVID-19 lockdown measures are also bad news for the global economy. China's retail sales in April, released the day before, plummeted by a whopping 11.1% compared to the same month last year. Exports in the same month hit the lowest level since June 2020. The worsening external conditions of the two major powers (G2) are cited as factors that further expand the debt vulnerability of emerging countries and stagflation risks. Lindsey Piesza, Chief Economist at Stifel Financial, said, "At this point, we cannot say we are in a stagflation phase yet," but evaluated it as "a very realistic risk considering the current economic situation."