Title : Analysis-Pain of breaking inflation will reverberate around the globe

Aug 29, 2022 01:08AM ET

By: AnalysisWatch

The message from the world's top finance chiefs is loud and clear: runaway inflation is here to stay, and taming it will require an extraordinary effort, most likely a recession with job losses and a shockwave in emerging markets.

However, it is worth paying the price. Central banks have spent decades building their credibility on their ability to fight inflation, and losing this battle could shake the foundations of modern monetary policy.

"Regaining and preserving confidence requires us to bring inflation back on target quickly," said Isabel Schnabel, a member of the European Central Bank's board of directors. "The longer inflation remains high, the greater the risk that the public will lose confidence in our determination and ability to preserve purchasing power."

Banks should also continue to operate even if economic growth suffers and people start losing their jobs.

"Even if we go into recession, we basically have little choice but to continue on our policy path," Schnabel said. "If inflationary expectations were to be unanchored, the effect on the economy would be even worse."

Inflation is in near double-digit territory in many of the world's largest economies, a level not seen for nearly half a century. With the notable exception of the United States, a peak is still months away.

The complication is that central banks, for the most part, seem to have only limited control.

Eventually, a new inflation regime is likely to take hold that will keep upward pressure on prices for a long time to come.

The global economy appears to be on the verge of a historic shift, as many of the aggregate supply tailwinds that have kept inflation in check appear to be turning into headwinds," said Agustn Carstens, Director of the Bank for International Settlements.

"The credibility of the last 40 years is at stake, so they're going to reduce inflation no matter what, even if it means collateral damage in the emerging world."