Global | Whatever is necessary to tackle inflation

The current inflationary process is still in full swing, and the action of central banks, the ultimate guarantors of price stability, will be greatly intensified from now on.

Key points

• Key points:
• According to the International Monetary Fund, inflation will reach an average of around 6% in developed economies in 2022 — something that has not been seen since the mid-1980s.
• Initially, the rise in prices was perceived by most to be only temporary—resulting from the imbalance between the very strong recovery in demand and the much slower rebound in productive capacity in the wake of the COVID-19 epidemic—with the central banks opting to take a cautious approach.
• After the latest energy shock, the broad based increase of prices across components and the spike in inflation expectations (far more so in the United States than in Europe), inflation has become one of the major risk factors for the global economy.
• The central banks have taken charge and are accelerating monetary policy normalization: first of all, by ending their asset purchase programs and then by raising interest rates. The Fed has already started along this path and will soon begin to raise rates more aggressively (50bp in its next few meetings), with the ECB following its lead in September (or possibly even July).
• Leaving to one side the debate as to whether the central banks (in particular the Fed) are “behind the curve”, the key from now on will be how they calibrate future rate increases. If they do not go far enough, it will take longer to get inflation under control; but, if they raise them too much, it could trigger a recession. What cannot be doubted, however, is that the central banks will do whatever is necessary to avoid an inflationary spiral, as they have the instruments and the credibility to ensure it does not occur.

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