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HomeEconomicsChristine Lagarde warns of long-term inflation risks after global economic upheaval

Christine Lagarde warns of long-term inflation risks after global economic upheaval


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The head of the European Central Bank has warned the recent upheaval in the global economy threatens to result in long-lasting changes, keeping inflationary pressures higher than normal and complicating the role of monetary policymakers.

Speaking at the US Federal Reserve’s annual conference in Jackson Hole, Wyoming, on Friday, Christine Lagarde said central bankers had to be “extremely attentive that greater volatility in relative prices does not creep into medium-term inflation through wages repeatedly ‘chasing’ prices”.

“If global supply does become less elastic, including in the labour market, and global competition is reduced, we should expect prices to take on a greater role in adjustment,” Lagarde said. “If we also face shocks that are larger and more common — like energy and geopolitical shocks — we could see firms passing on cost increases more consistently.”

Her comments come on the heels of earlier remarks by Jay Powell, the chair of the US central bank, who warned the Fed had not yet vanquished inflation and may need to implement more rate rises, albeit while treading “carefully”.

Central bankers, particularly in advanced economies, are at critical junctures in their respective battles against inflation. Consumer price growth has moderated from its recent peaks in the aftermath of the pandemic, but still remains well above the longstanding 2 per cent level that many target.

Coupled with concerns about an impending economic slowdown and tighter financial conditions, views have become more fractured about how to calibrate monetary policy to ensure inflation comes down without causing unnecessary pain for businesses and consumers.

The ECB has left the door open to a pause in policy tightening at its next meeting on September 14 after raising its benchmark deposit rate nine consecutive times from minus 0.5 per cent to 3.75 per cent.

Recent business surveys indicate the eurozone is heading for a fresh downturn, prompting investors to hedge their bets on the ECB raising rates again next month. But much of this hinges on inflation and whether it continues to fall, particularly after excluding volatile energy and food prices.

Lagarde, however, gave little indication of which way she was leaning, only repeating the need to set rates at “sufficiently restrictive levels for as long as necessary” to bring inflation back to target in a timely manner.

She said rate-setters needed clarity, flexibility and humility to cope with uncertainty caused by the multiple shocks to the global economy, including the coronavirus pandemic and Russia’s full-scale invasion of Ukraine.

Eurozone inflation has halved from last year’s peak of 10.6 per cent and economists polled by Reuters forecast it to slow from 5.3 per cent in July to 5 per cent in August when new price data is released next week.

However, a rebound in European tourism this summer could keep services inflation high. This would complicate matters for the ECB, which has said underlying inflation — of which services are a big driver — needs to fall sustainably before it stops raising rates.

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