Inflation, Stock Market and Business News as of June 29, 2022

Credit…Haiyun Jiang/The New York Times

SINTRA, Portugal — Three of the world’s top central bankers made a grim prediction Wednesday: The forces that dragged down inflation for decades before the start of the pandemic may never return, forcing policymakers to continue efforts to cool down their economies in a bid to bring rapid price increases back under control.

“Since the pandemic, we have been living in a world where the economy is being driven by very different forces,” Jerome H. Powell, chairman of the Federal Reserve, said on Wednesday, speaking on a panel alongside heads of the European Central Commission. . Bank and the Bank of England in Sintra, Portugal. Before, forces like young demographics and globalization helped keep production cheap and price increases slow.

“What we don’t know is whether we’re going to go back to something that’s more or a little like what we had before,” Powell said. “We suspect it will be a bit of a mix.”

Christine Lagarde, Powell’s counterpart in Europe, gave an even more blunt assessment, saying the era of low inflation that prevailed before 2020 is unlikely to return.

“There are forces that have been unleashed as a result of the pandemic, as a result of this massive geopolitical shock that we are facing now, that are going to change the image and the landscape in which we operate,” Lagarde said. , referring to the war in Ukraine, which has pushed up commodity prices considerably.

Andrew Bailey, the Governor of the Bank of England, agreed that this was a new period of rising prices that politicians needed to fight.

His comments underscored the challenge facing central bankers as inflation rises in many developed economies. Some of the recent recovery has been driven by strong domestic demand in countries like the United States, where apartment rents are rising sharply, hotel room rates are skyrocketing and a range of services have become more expensive. But shared and unpredictable supply shocks, including factory closures, shipping snarls and rising food and fuel costs triggered by the war in Ukraine, are driving much of the price increases in all the world.

That makes this moment difficult for central bankers to navigate. Its tools primarily make money more expensive to borrow, weighing on demand by making people and businesses less willing to spend. But they can do little to affect supply.

Still, officials around the world are deciding they can no longer wait for the shortage to go away. Central bankers around the world are raising interest rates to try to reduce demand to a point where it is more in line with today’s limited supply of goods and services.

It’s unclear when or what normalcy will return as companies and countries talk of moving factories closer to home in a move away from globalization, which had been keeping prices down by containing production and labor costs. And, more importantly, rapid price increases threaten to change consumer inflation expectations as they move into their second year. If the outlook on price increases changes, it could make inflation a more permanent feature of the economy by causing households and businesses to approach wage negotiations, spending and pricing decisions differently.

“The risk is that, due to a multiplicity of shocks, the transition to a higher inflation regime begins,” Powell said. “Our job is to literally prevent that from happening. And we will prevent that from happening.”

As inflation runs at the fastest pace in four decades in the United States, Fed policymakers have been raising interest rates rapidly to try to rein them in, including a big three-quarter-point hike in June. Central bankers have indicated they want to raise rates well above 3 percent, from their current range of 1.5 percent to 1.75 percent, by the end of the year.

“The point of that is to slow growth so supply can have a chance to catch up,” Powell said Wednesday. “It’s a necessary adjustment that needs to happen.”

The ECB plans to raise rates for the first time in more than a decade at its July meeting, and Lagarde has signaled that when the ECB raises rates again in September, it is likely to be an even bigger hike. This week, he sent a message that the risk of persistently high inflation outweighs a prospect of slowing economic growth in the eurozone.

The Bank of England, which began raising rates in December, has tried to tread a “narrow path” between reining in inflation, which hit a 40-year high of 9.1 percent in May, and concerns about the Stagnation of the economy as the cost of living, including food. and fuel prices rise.

But amid signs that wages are rising faster than usual in Britain and more goods and services are seeing above-average price increases, the Bank of England has opened the door for a more aggressive policy response.

“If we see further persistence of inflation, meaning second-round effects, then we will act strongly,” Bailey said on Wednesday.

Both the eurozone and Britain have experienced particularly large shocks to energy prices, exacerbated by the Russian invasion of Ukraine. With energy prices still high and the war driving up global food prices, Europe’s central bankers are wary of so-called second-round inflation generated by domestic companies setting higher prices, especially in the food sector. of services, and faster wage growth.

As central bankers around the world withdraw support, the global economy appears to be hurtling toward a sharp slowdown. The Bank for International Settlements warned this week in its annual report that there was a risk of a “stagflationary hard landing” if high inflation persists, central banks stifle growth and financial markets and indebted companies come under pressure.

It is not only international organizations that are interested.

While the Fed is trying to cool the US economy without plunging it into recession, Powell acknowledged on Wednesday that the central bank’s efforts to slow consumer and business demand to cool inflation were “very likely to cause some pain.” .

The risk of a serious recession has become more acute as the war in Ukraine keeps commodity prices high, raising the chance that central bankers will have to contain growth more drastically to allow constrained supply to contract. catch up and prices relax.

“It’s gotten harder, the roads have gotten narrower,” Powell said of the so-called soft landing. “However, that is our goal.”

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