“The response to instability should not be a matter of monetary policy alone”

IIt takes a serious stretch of the imagination to remember that exactly three years ago, at the annual Federal Reserve (Fed) symposium in Jackson Hole, Wyoming, it was all about the perils of low inflation and the means to combat it. This year, the tone was quite different. With great firmness, both the European Central Bank (ECB) and the Fed have emphasized the imperative of bringing inflation down to 2% in an attempt to restore credibility damaged by the poor results of 2022. We cannot be careful to do so.

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However, while the Fed essentially sticks to steering rate expectations for the coming months, the ECB has begun to develop a more structural analysis. Over the course of a series of speeches – first by Isabel Schnabel (the German member of the management board), then by the president, Christine Lagarde – the idea is being developed that we have entered, since 2020, a new period. marked by the prevalence of inflationary risks.

Christine Lagarde’s speech at Jackson Hole is the most articulate expression of this analysis. He cites three lasting changes: the change in the energy context, amplified by the accelerated transition to a low-carbon economy; the growing fragmentation of the global economy, notably as a result of the rise of geopolitical rivalries; the transformations of a labor market still marked by the consequences of the pandemic. The combination of these three factors could sign not only the end of a deflationary decade, but also that of the “great moderation” in prices and wages that had begun in the early 1990s.

The recurrence of shocks

There is no doubt that the war in Ukraine marks the break between a period of fossil fuel abundance and a period of changing energy systems. Ultimately, this change will put an end to dependence on carbon energies and should restore a form of energy self-sufficiency, which should be a factor of stability. But the next twenty years are likely to be marked by the recurrence of shocks to the supply of critical minerals and by the fragility of an energy system in transformation. We will not return to a world where Russian gas and American shale gas ensured market equilibrium without too many price variations.

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There are also plenty of reasons to think that geopolitical rivalries and the fragmentation of the global economy will have a clear inflationary impact. However legitimate it may be, the imperative of resilience has a cost, which will be measured in additional inflation points. Added to this is the effect of what is modestly called the reduction of Chinese risk, which is often the screen for protectionism, in a context where, after having played the role of world reserve army for nearly three decades, China had ceased to exert disinflationary pressure on the global economy anyway. On this ground, the central bankers are not in a decision-making position, but they are right to say firmly that political choices are paid for.

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