Persistent Inflation Worries Dominate European Central Bank Conference
The 10th annual conference of the European Central Bank (ECB) held last week in Sintra, Portugal, highlighted the growing concerns around persistent inflation among policymakers and central bankers from around the world. The conference revolved around discussions on monetary policy and the measures needed to tackle rising prices.
The word “persistence” replaced “transitory” as the term most associated with inflation in the current economic environment. Federal Reserve Chair Jerome H. Powell acknowledged his surprise at the prolonged nature of inflation, emphasizing the need for policymakers to be equally persistent in their efforts to address it. Christine Lagarde, the president of the European Central Bank, echoed these sentiments, stating that they must match the persistence of inflation.
Despite signs of slowing inflation, both the United States and Europe continue to face strong domestic price pressures. In the eurozone, while overall inflation slowed to 5.5 percent, core inflation, which measures domestic price increases, rose. Policymakers are grappling with the challenge of achieving their 2 percent inflation targets without jeopardizing their economies.
Clare Lombardelli, the chief economist at the Organization for Economic Cooperation and Development, highlighted the uncertainties surrounding inflation and the difficulty in determining when enough measures have been taken. Experts at the conference acknowledged the limitations in accurately forecasting inflation and the need for caution in policy decisions.
Gita Gopinath, the first deputy managing director of the International Monetary Fund, emphasized the need for higher interest rates until core inflation shows a downward trend. She also warned of the likelihood of more frequent economic shocks due to the volatilities caused by the ongoing global pandemic.
The discussions at the conference also revealed the lack of knowledge on various economic factors, including inflation expectations, energy markets, and the impact of consecutive shocks on people and businesses. Economists noted their struggle to adapt to central banks consistently underestimating inflation and the erosion of trust in forecasts.
However, there were differing opinions on the appropriate response to inflation. Some argued that previous rate increases would sufficiently address the issue, while others emphasized the need for a tougher stance to maintain the credibility of central banks. Erik Nielsen, an economist at UniCredit, suggested that excessive reliance on past inflation data instead of forward-looking indicators could lead policymakers astray.
Central bankers in the eurozone have opted to be “data dependent” and base their decisions on current data rather than relying on predetermined actions, reflecting the lack of trust in existing models.
The overall message from the conference was that interest rates will remain high for an extended period. Policymakers are navigating the tightrope of controlling inflation while avoiding disruptions to economic growth. With persistent inflation and uncertainties surrounding its trajectory, central banks face the challenge of striking the right balance to support their economies.