Inflation has returned to levels not seen in many developed economies since the 1970s and 1980s. Economists and central bankers at the European Central Bank conference in Portugal warn that it will take time for inflation to cool down.
– How did we get here? –
For the ECB, which was set up in 1998 to oversee the European single currency, the surge in inflation is unprecedented.
“Current levels of food and industrial inflation have not been seen since the mid-1980s,” ECB President Christine Lagarde said in her speech at the conference on Tuesday.
Likewise, the “rise in relative energy prices in recent months is much higher than the individual spikes that occurred during the 1970s oil shock,” Lagarde said.
The rise in inflation of over 8 percent in the euro zone in May came at the end of a “sequence that is happening in a chaotic world,” Richard Baldwin, an economics professor at the Graduate Institute of Geneva, told AFP.
The supply shock caused by the outbreak of the coronavirus pandemic in 2020 has been followed by a “demand reversal” with people spending more on goods, Baldwin said.
Instead of seeing this abatement, the Russian invasion of Ukraine is causing “a huge spike in fuel and food prices” and increasing pressure on inflation, he said.
But it’s not just energy. As health restrictions lift, consumers are turning back to services while pent-up demand for tourism is released, Lagarde noted.
“There is no playbook for this inflation,” said economist Baldwin.
– How long will it stay like this? –
With no end in sight to the war in Ukraine, the resulting disruptions in energy supplies could keep prices high for some time to come.
Domestic factors could also support high inflation rates as workers demand increasing compensation to offset rising living costs.
Additional pressures come from low unemployment rates, which put more pressure on workers looking for pay increases.
– What can central banks do? –
Central banks’ message is one of their most powerful tools to calm markets and control prices.
But the task has become “quite difficult given the high inflation numbers” and “people feel high inflation every day when they buy groceries or go to the gas station,” Isabel Schnabel, a member of the ECB’s Executive Board, told AFP.
“There is little we can do about the current inflation, but we will take decisive measures to ensure that inflation returns to our (two percent) target in the medium term,” said Schnabel.
“Once inflation is there and expectations and wages start to rise, monetary policy should act,” Sebnem Kalemli-Ozcan, an economics professor at the University of Maryland, told AFP.
That’s what the ECB has planned and announced a rate hike for July, the first in over a decade. But the Frankfurt institute has to be careful not to completely choke off the stuttering growth.
“The question is not whether prices will fall after some time, but what will happen with the growth,” said Kalemli-Ozcan.
For this reason, comparisons are made to the 1970s and the “stagflation situation,” where inflation persisted while growth rates stalled, she said. “There is a risk of stagflation in Europe.”
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