Lagarde warned of ever-increasing inflation volatility in the future: will central banks really be able to control prices?
Increasingly volatile inflation and a changing global economy will make it difficult for central banks to control prices in the future, according to Lagarde.
Speaking at an IMF event in Washington, the president of the ECB warned of the economic pitfalls of the coming years that undermine the central banks’ ability to intervene promptly and effectively to balance prices and prevent shocks to growth.
Deglobalization, protectionism, major technological advances, and wars are just some of the events that have thrown economists into uncertainty, with most of them failing to predict the recent surge in inflation. This is why economic dynamics risk becoming unpredictable according to Lagarde.
Why Lagarde says prices will be difficult to control
Profound changes in the global economy could make inflation volatile for years to come, complicating efforts to control prices, but sticking to inflation targeting regimes remains the best option, Lagarde said.
The pandemic, the war in Ukraine, and the energy crisis “have changed the structure of the economy and challenged the way we assess the impact of monetary policy”, the ECB president said. More supply-side shocks are expected in the future.
Lagarde, who took over the ECB just months before the pandemic began, argued that the world ahead is more uncertain and that more flexibility, not new mandates, is needed.
“As we enter an era of inflation is more volatile and monetary policy transmission is more uncertain, maintaining this tool for price formation will be essential,” he said. “But that doesn’t mean the way we conduct monetary policy will stay the same.”
In April, Isabel Schnabel, a member of the ECB’s executive board, said the ECB should consider rethinking how it forecasts economic growth and inflation to improve communication and respond quickly to shocks, warning that it could be risky to rely on publishing baseline projections alone.
In essence, it has become clear in recent years that inflation is increasingly driven by supply-side factors and not so much by demand, complicating the role of central banks. Their action on interest rates is closely correlated with demand. But, at this point, that may not be enough.
Inflation and Big Tech
One of the key changes in the global economy is the dominance of large companies in the digital world, such as cloud services, e-commerce, internet search, and perhaps even artificial intelligence.
Big tech are less dependent on external financing and have a smaller share of labor, so they are less sensitive to changes in interest rates and, consequently, reduce the central bank’s ability to steer the economy.
According to Lagarde, a reversal in globalization could happen in the opposite direction, strengthening central banks, if companies shorten their value chains through “nearshoring” or “friend-shoring”.
In this case, the need for capital would make companies more sensitive to changes in interest rates.
Lagarde said that the increase in capital could increase the economy’s dependence on interest rate changes, potentially improving the effectiveness of monetary transmission through the interest rate channel.
The problem is that such changes could also lead to higher inflation volatility, especially if IT giants are less sensitive to monetary policy and manufacturers are more affected.
Original article published on Money.it Italy 2024-09-21 10:37:27. Original title: L’inflazione sarà fuori controllo? L’allerta di Lagarde
