Inflation: are central banks finally ‘superheroes’ again?
Strong and sustained inflation from 2021
The strong and sustained rise in inflation starting in 2021 has given the current central bankers their moment of glory. In 2023, most countries will bring inflation under control, not without great pain. This problem caused food and energy prices to skyrocket in 2022 after Russia invaded Ukraine.
Many economies saw inflation reach levels not seen since the 1970s or early 1980s, with consumer price growth reaching 9% in the United States, 10.7% in the Eurozone, and higher in some emerging economies that were particularly affected. reached a lot.
This price increase is the result of a combination of inflationary forces. Generous post-pandemic relief measures and accommodative monetary policy have led to an increase in consumer spending. These costs have outstripped the ability of factories and ports to respond, especially due to supply problems caused by new Covid pollution outbreaks, extreme weather or other shocks. The sharp increase in the price of oil, gas and grain caused by the war in Ukraine added fuel to the fire.
Slow braking or acceleration
As inflation rose, intense economic debate ensued about how strongly central bankers should apply the economic brakes—for example, by raising interest rates to stop rising prices. Some “doves” have recommended soft intervention, explaining that since most of this inflationary growth is due to supply problems, it should largely subside on its own.
Others argued that as long as consumers were willing to spend, reducing price pressure in one part of the economy would save them money to spend on other expenditures, which would raise prices in another part of the economy.
Increase in basic rates
At the beginning of 2022, the last glimpse began to take hold. Patiently waiting for rates to come down on their own in 2021, the Federal Reserve raised its key key interest rate by 0.25% in March, then by 0.5% in May, and by a whopping 0.75% in June. However, for much of this period, central bankers hoped that inflation would be brought under control without the economy falling into a growth-inducing recession.
In March, Fed Chairman Jerome Powell said that “historical experience gives reason to be optimistic” about the Fed’s ability to do a “soft landing.” Since August, the tone of his statements has changed. Higher interest rates will ultimately be better than inflation, “but they will also have painful consequences,” he said.
Other bankers agreed. “For the first time in four decades, Isabel Schnabel, a member of the ECB’s board of directors, said that central banks must demonstrate their determination to maintain price stability.” Federal Reserve forecasts higher unemployment in 2023; The Bank of England predicts that Britain’s GDP will decline.
2022, a global and synchronized shift of central banks
In fact, the World Bank notes that the world has rarely seen a synchronized global shift towards growth-restricting policies in 2022 in the last half-century. One exception was the 1982 year of economic leaders around the world. decided to put an end to the ten-year inflation problem.
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They succeeded, but at the cost of global recession. This period of great hardship for many people was considered a triumph by most central bankers. Unfortunately, in 2023, this profession will welcome a new generation of heroes. Rarely has the world witnessed such a synchronized global shift toward growth-restricting policies.
Ryan Avent, Trade and International Economics Editor, Economist