The fight against inflation will have plantar fallout


JACKSON HOLE, Wyoming (Reuters) – The rhetoric of the world’s top financial leaders is increasingly clear: inflation is settling in for a long time and containing it will require an exceptional effort that risks triggering a recession, and therefore a rise. unemployment and serious difficulties for emerging countries.

However, the stakes are worth the candle: it has taken several decades for central banks to gain credibility in the fight against inflation, and losing the current battle would jeopardize this process, at the risk of undermining the foundations of policy. modern mount.

“Regaining and maintaining confidence requires us to quickly bring inflation back to our target,” said Isabel Schnabel, member of the executive board of the European Central Bank (ECB). “The longer inflation remains high, the greater the risk that public opinion will lose confidence in our determination and our ability to preserve purchasing power.”

“Even if we go into recession, we simply have little choice but to maintain our policy direction,” she added. “If inflation expectations were to become unanchored, the impact on the economy would be even worse.”

Inflation is close to 10% in many of the world’s major economies, unseen for almost 50 years, and outside the United States, its peak still seems far from being reached.

The problem is that central banks have relatively little control over price developments.

Firstly because this stems essentially from the evolution of energy prices linked to the war in Ukraine, a supply shock that monetary policy alone cannot resolve, secondly because these tensions are exacerbated by the growth in public expenditure, with governments multiplying measures to support purchasing power.


A study presented in Jackson Hole thus concludes that half of American inflation is influenced by budgetary policy and that the Fed will only be able to regain control of prices if it cooperates with political power.

More broadly, a new inflationary regime seems to be taking hold, at the risk of sustaining upward pressure on prices.

De-globalization, the overhaul of strategic alliances linked to the war in Ukraine, demographic changes and the increase in production costs in emerging countries could thus feed this phenomenon.

“The global economy appears to be on the verge of a historic shift in which many of the supply tailwinds that have helped contain inflation appear to be turning into headwinds,” summed up Jackson Hole Agustn Carstens, the Managing Director of the Bank for International Settlements (BIS).

“If so, the recent uptick in inflationary pressures could prove more persistent.”

All of these elements call for rapid interest rate increases and the maintenance of high rates for several years.

Problem: The Fed’s tightening policy will have repercussions far beyond the United States and will be particularly painful for emerging countries, a factor that the central bank cannot afford to take into account.


“The credibility of the last 40 years is at stake, so it will drive down inflation whatever the consequences, including if it involves collateral damage in the emerging world,” said Peter Blair Henry, meritorious professor of the New York University Stern School of Business.

Many emerging countries borrow on the dollar markets and the rise in US rates therefore increases their debt costs, while diverting capital flows to the United States, which drives up risk premiums and further complicates their financing. .

Moreover, the appreciation of the dollar against most other currencies is fueling inflation in many emerging countries.

China and India seem relatively protected from this point of view, but countries like Turkey and Argentina are already suffering.

“There are a number of ‘frontier’ economies and low-income countries that have seen their yield spreads soar to what we call levels of distress or near-distress, between 700 and 1,000 basis points.” , said Pierre-Olivier Gourinchas, chief economist of the International Monetary Fund (IMF).

This situation, he specified, already concerns around 60% of low-income countries and about twenty of them “still have access to markets but their borrowing conditions have deteriorated considerably”.

S&P Global, for its part, now considers the risk associated with South African, Argentinian and Turkish borrowers to be high or very high, as well as Chinese, Indian or Indonesian financial institutions.

“There are a small number of ‘frontier’ economies like Sri Lanka, Turkey, that will be hit if the Fed raises rates and if rates stay high,” says Eswar Prasad, professor of economics at Cornell University. . “a horizon of two or three years, the situation will begin to become difficult.”

(With Ann Saphir, French version Marc Angrand, spoken by Kate Entringer)

by Balazs Koranyi and Howard Schneider

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