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Inflationary era leaves Powell and Lagarde searching for answers

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Since the pandemic, we have been living in a world where the economy has been driven by very different forces than usual.”, said the president of the Federal ReserveJerome Powell, in a panel moderated by Francine Lacqua of Bloomberg Television.

Next to him, the president of the European Central BankChristine Lagarde agreed that she does not think “that we will return to that low-inflation environment.”

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Speaking Wednesday at the central bank forum in Sintra, Portugal, Powell explained how forces, including globalization, aging populations, low productivity and technological developments, are no longer keeping prices in check. The Fed’s alarm over inflation recently prompted officials to raise rates to the highest since 1994.

What we don’t know is if we will return to something similar to what we had before; we suspect it will be a kind of mix.” said Powell. “We’re learning to deal with it.”

Central bank officials from around the world gather for the first retreat of the ECB after the onset of the pandemic against a backdrop of rising consumer prices, threats to economic growth, and the possibility of further power outages. Lagarde observed, with a hint of nostalgia, that things simply will never be the same.

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There are forces that have been unleashed as a result of the pandemic, of this massive geopolitical shock that we are facing now, and that will change the image and landscape in which we operate.”, he indicated.

The Governor of the Bank of England, Andrew Bailey, whose economy is also dealing with its departure from the European Union. He noted that the sheer succession of impacts hitting the UK is in itself a challenge.

More than 80 central banks have raised interest rates this year.

It’s how you deal with a series of big supply shocks without air gaps between them, which of course is reflected in expectations.“, said.

lagarde echoed Powell to provide a similar list of the forces that have contained inflation in the last 20 years, including manufacturing”just in time”. She foresees that the changing age will herald even more turmoil.

That has changed and will probably continue to change to a system that we are not sure about.Lagarde pointed out.

Powell cautioned that while he sees raising rates as possible without triggering a recession, “it will be a great challenge”. The ECBwhich is on track to raise the rate for the second time in the next quarter, must be ready to step up action if necessary, while gradually moving to account for high uncertainty, it said. lagarde.

The head of the US central bank warned that it may be too early to judge whether high inflation is a more permanent feature of the global economy, noting that economists’ models failed to anticipate a big supply shock.

That process could work in reverse“, said. “Inflation could fall faster”.

Meanwhile, central bankers must adapt to the new reality.

We have lived in that world where inflation was not a problem.” said Powell. “I think we better understand how little we understand about inflation.”

Source: Gestion

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