Entering a New Inflation Era... "Can't Return to Pre-Pandemic Times," Why? [End of Low Inflation]

On the 29th (local time), Andrew Bailey, Governor of the Bank of England (BOE) (from the left), Agustin Carstens, General Manager of the Bank for International Settlements (BIS), Christine Lagarde, President of the European Central Bank (ECB), and Jerome Powell, Chair of the U.S. Federal Reserve (Fed), attended and spoke at the European Central Bank (ECB) Annual Forum held in Sintra, Portugal.
[Image source=Reuters News Agency]

[Asia Economy New York=Special Correspondent Seulgina Jo] Low inflation, low interest rates, and high growth are now things of the past.

The message delivered on the 29th (local time) by the heads of major central banks, who bear the task of curbing soaring inflation without causing a recession, ultimately concludes that the global economy has entered a "new era" based on high inflation. This marks a period where central bank monetary policies inevitably must change in response to the rapidly shifting economic dynamics following the pandemic (global pandemic).

◇ "We cannot return to the pre-pandemic era... The era of low inflation will not come back"

The reason why the concerns of central bank governors have deepened is that the factors affecting the global economy have changed significantly compared to before the pandemic. At the ECB Annual Forum held in Portugal on this day, Jerome Powell, Chair of the U.S. Federal Reserve (Fed), Christine Lagarde, President of the European Central Bank (ECB), and Andrew Bailey, Governor of the Bank of England (BOE), who gathered in one place, unanimously stated, "The era of low inflation will not return" and "We cannot go back to the pre-pandemic period."

For the past 30 years, countries have grown together based on globalization, but now, with the trend of deglobalization, they have split into separate competitive blocs. Supply chains are fragmented, productivity is declining, and various costs are inevitably rising. Moreover, the sudden outbreak of the COVID-19 pandemic instantly disrupted the global supply chain system. Inflationary pressures intensified further following Russia's invasion of Ukraine in February.

Chairman Powell assessed that these changes in dynamics are even altering the Fed’s role, which has long aimed for "price stability" and "maximum employment." He explained that this inevitably has a significant impact on the policy stance of central banks worldwide.

He said, "The past decade was the peak of deflationary factors. Currently, at least for the time being, those factors seem to have disappeared," adding, "We are in a completely different new world with higher inflation, many supply shocks, and strong global inflationary pressures." He also emphasized, "Monetary policy must be approached in a very different way." Powell admitted that forecasting inflation in this environment has become a much more difficult task and confessed, "Only now do we better realize how ignorant we have been about inflation."

President Lagarde also indicated the need for a change in central bank policy direction in the future, stating, "The era of low inflation will not return." She pointed out, "Continuous efforts are needed to achieve inflation targets," and also noted, "Unlike in the past, fiscal and monetary policy coordination is not effectively taking place."

Many countries are commonly experiencing soaring inflation, growing concerns about economic slowdown, and shocks from surging energy prices. Augustin Carstens, General Manager of the Bank for International Settlements (BIS), said, "Each country's situation is different," but evaluated, "Everyone's goal is to control inflation."

◇ Powell: "The bigger mistake is failing to control inflation"

There is also a strong sense of crisis that high inflation could become entrenched if things continue as they are. This is the part that major central bank heads are most worried about. The reason the Fed and others have recently warned of a recession yet still announced aggressive tightening is precisely because of this. The Fed, which has taken on the role of inflation fighter, raised interest rates by 0.75 percentage points this month and has signaled another increase of 0.5 or 0.75 percentage points next month.

At the forum, Chairman Powell said that while rapid rate hikes could pose economic risks, the bigger mistake would be failing to curb soaring inflation. He stated, "Is there a risk that (tightening) could go too far? Of course, there is a risk," but emphasized, "I do not agree that (excessive tightening) is the greatest (economic) risk. The bigger mistake is failing to restore price stability." This is a message that the risk of recession must be accepted to achieve the top policy goal of price stability.

Powell also mentioned the multiplicity of shocks that can occur in a high inflation regime, saying, "Our mission is to prevent this." He added that it is also important to suppress long-term inflation expectations, explaining that this prevents inflation expectations from becoming entrenched and creating a "self-fulfilling cycle."

President Lagarde reaffirmed the ECB’s prior announcement of rate hikes in July and September. While emphasizing a "gradual direction," she stressed, "We will respond more swiftly if necessary." BOE Governor Bailey, who decided on five consecutive base rate hikes, said, "The global economic shock is significant. The UK has also been hit," but added, "If inflation persists longer, we will respond more strongly." Bloomberg News evaluated, "Central bank heads have now acknowledged how much the world has changed."