Overcoming the inflationary shock will take time

Overcoming the inflationary shock will take time

The world has entered an inflationary phase it has not seen since the 1970s and 1980s and it will take time to bring it back down, economists and central bankers warned at an ECB seminar in Portugal that ends on Wednesday.

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For the young European Central Bank, responsible for driving price developments in the euro zone, the current period is unprecedented.

During the Sintra seminar in Portugal, its president Christine Lagarde estimated that the “current levels of inflation in food and industrial products” have reached a scale “not seen since the mid-1980s.”

Likewise, “the increase in the relative price of energy in recent months is well above the individual peaks that occurred in the 1970s” during the first oil shock, he added.

The current rise in prices, of more than 8% in May in the euro zone, occurs after “a sequence in a chaotic world”, explains Richard Baldwin, professor at the Graduate Institute of Geneva, to AFP, meeting in Sintra.

“After the Asian supply shock in 2020 (due to the Covid-19 pandemic), the shift in 2021 from demand for services to demand for goods caused another shock. And instead of seeing that fade away, the Russian invasion of Ukraine was triggered, causing a huge spike in fuel and food prices,” he said.

Not only. We also see household spending on services soaring as health restrictions linked to the Covid pandemic are lifted. This can be seen with the boom in tourism and leisure activities, which is also fueling inflation.

Services price inflation reached 3.5% in May, the highest level since the mid-1990s.

This accumulation of such diverse influences is unprecedented. “There is no reference manual for this inflation,” Judge Richard Baldwin.

While the Russo-Ukrainian war could last “years”, according to the NATO chief, supply cuts could keep energy prices high.

Along with imported inflation, domestic factors can also have a lasting impact. Employees are therefore increasingly demanding compensation from their employers, which can fuel inflation.

In addition, in the labor market, unemployment rates are quite low on average and hiring intentions are high, which plays in favor of an increase in wages. And inflation.

Communication is, in principle, at the center of its action to control prices.

However, this task “is difficult at the moment in the face of high inflation figures”, when “people feel high inflation every day when they buy food or go to the gas station, and many suffer a substantial drop in their real income” Elizabeth admits. Schnabel, member of the executive committee of the ECB, questioned by AFP.

“There is little we can do about current inflation, but we will take decisive action to bring inflation back to our medium-term target,” he said.

“Once inflation is there and starts to raise expectations and wages, monetary policy needs to act,” warns Şebnem Kalemli-Özcan, a professor at the University of Maryland.

That is what the ECB plans to do by raising its interest rates from July. At the same time, you need to make sure you don’t stifle slowing economic growth.

Because “the question is not whether prices will go down after a while, because they will go down eventually, but what will happen to growth,” warns Ms Kalemli-Özcan.

“That’s why some have made the comparison to the 1970s when there was stagflation,” meaning high inflation and slow growth. And to conclude: “in Europe there is a risk of stagflation”.

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