The return of inflation

Speech by Mr Agustín Carstens, General Manager of the BIS, at the International Center for Monetary and Banking Studies, Geneva, 5 April 2022.

After more than a decade of struggling to bring inflation up to target, central banks now face the opposite problem. Inflation is back. The rise in inflation reflects the rapid and goods-intensive economic recovery from the Covid-19-induced recession – bolstered by highly accommodative fiscal and monetary policy – which supply has been unable to fully meet. We should not expect inflationary pressures to ease soon as many of the forces behind high inflation remain in place and new ones are emerging. There are already signs of increased price spillovers across sectors and between prices and wages, as is common in a high-inflation environment. Moreover, the structural factors keeping inflation low in recent decades may wane as globalisation retreats. The inflationary paradigm may be changing. Central banks need to adjust to this new environment, not least by raising policy rates to more appropriate levels. The world economy must learn to rely less on expansionary monetary policies.