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Inflation Challenge Has Put Global Economy at “Critical Juncture”: International Central-Bank Authority

Isaac Nuriani    |
Jun 30, 2023
  • Central-bank body says inflation containment is the only option.
  • Concerns grow that “inflation psychology” may be setting in.
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It’s tempting to think our inflation challenge, now a little more than two years old, is well in hand. After all, a year ago the consumer price index (CPI) was more than 9%. Its pace of growth has declined every month since, and is now down to an even 4% as of May.[1]

But 4% is not 2%, which is close to where CPI was in March 2021, the month before the index entered the current inflationary period.[2] It’s also the level that’s served as the Federal Reserve’s official inflation target since 2012.[3]

In other words, 2% is the “promised land” for inflation in America, and we’re not back there just yet.

There also is reason to wonder if it might take longer than expected to get there. Signs are emerging suggesting that the further the inflation rate drops, the “stickier” it’s starting to become. Sticky inflation refers to price pressures that, while not acutely high, necessarily, can remain persistent.

Core inflation, which excludes volatile food and energy prices, is showing signs of that stickiness. For one thing, monthly core CPI has increased at a pace of 0.4% or faster since December 2022. As for the annual number, core inflation increased 5.3% in May. In December 2022, core inflation was up by 5.7%.[4] That “improvement,” such as it is, isn’t enough for some members of the Federal Reserve, who suggest it actually serves as proof of just how persistent inflation really is right now.

During a recent public appearance in Norway, Fed Governor Christopher Waller recently pointed to core CPI as evidence that inflation had, in fact, become sticky.

“Core inflation is not coming down like I thought it would,” Waller said. “Inflation is just not moving, and that’s going to require, probably, some more tightening to try to get that going down.”[5]

During a separate public appearance in Maryland, Thomas Barkin, president of the Federal Reserve Bank of Richmond, underscored his view that additional rate hikes could be in order.

“I want to reiterate that 2% inflation is our target and that I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target,” Barkin said. “If coming data doesn’t support that story, I’m comfortable doing more.”[6]

The notion of “doing more” after everything that’s been done so far may prompt some weary consumers to roll their eyes – especially after Fed officials decided to actually pause rate hikes for now at their most recent policy meeting.

But the reality is that as much as inflation has come down from its highest levels, price pressures remain an issue both here and around the world. And the fact that they are still an issue is prompting the Bank for International Settlements (BIS) – essentially the “umbrella” authority of the world’s central banks – to call for even more interest rate hikes, saying the global economy has now reached a pivotal juncture amid the inflation that has beset it.

There are concerns that rate hikes run the risk of “breaking” the economy by exploiting potential vulnerabilities in areas such as the banking system. The BIS readily acknowledges these considerations. But in their assessment, inflation that is not fully contained will demand “higher for longer” interest rates that eventually could trigger greater consequences for the economy.

Let’s take a closer look at all of this.

Chief Central Banker: “Unrealistic Expectations of Monetary and Fiscal Support Need to Be Corrected”

The Bank for International Settlements – the “bank for central banks,” as it’s known – has issued its 2022/2023 annual report. And if you were looking for the BIS to use the report as a way to give constituent central banks the proverbial pat-on-the-back for how diligently they’ve been pursuing the worst global inflation problem in more than four decades, you might be disappointed.

Instead, the BIS made clear its view that however much heavy lifting has been done so far, a good deal more may need to be done in order to bring inflation around the world under control, once and for all – and that the good order of the world’s economy is at stake.

“The global economy is at a critical juncture. Stern challenges must be addressed,” Agustin Carstens, BIS general manager, said in the report.

Carstens added that “the time to obsessively pursue short term growth is past. Monetary policy must now restore price stability. Fiscal policy must consolidate.”[7]

In other words, the BIS is saying, trying to “manage” the rate-tightening process in the interest of preserving a measure of growth cannot be the priority; inflation is showing signs of digging in, and if it’s allowed to do so, getting rid of it then could require a much-higher level of pain than anyone has felt up to this point.

As for the matter of fiscal policy consolidating, Carstens suggested that much of the inflation we’re experiencing is rooted in a mindset on the part of governments and central banks that has come to see chronically looser monetary policy and expansionary fiscal policy as acceptable.

“Unrealistic expectations that have emerged since the Great Financial Crisis and COVID-19 pandemic about the degree and persistence of monetary and fiscal support need to be corrected,” Carstens said during a press conference at which he formally presented the annual report.[8]

Of particular concern to the BIS is the possibility that global society begins to adapt to – even assume – an inflationary environment, going forward. This condition is known as inflation psychology. It can manifest more easily when low unemployment is a characteristic of the inflation period at issue – and could prove particularly consequential.

Inflation Psychology

“There is a material risk that an inflation psychology will take hold, where wage and price increases start to reinforce each other,” the BIS said.[9]

The BIS report explains inflation psychology this way:

Households and firms become more attuned to price shifts and keener to make up for lost purchasing power and profits. As a result, the feedback between prices and wages gets stronger in a high-inflation regime.[10]

But the forces don’t feed one another benignly forever, as Richard Curtin, former director of the highly regarded University of Michigan consumer sentiment surveys, pointed out last year.

“Prices and wages will continue to spiral upward until the cumulative erosion in inflation-adjusted incomes causes the economy to collapse in recession,” Curtin said.[11]

Inflation-psychology risk is just one reason why Fed officials Waller and Barkin do not appear to be assuming a philosophical posture about the sticky inflation they’re seeing in the U.S. right now. Or embracing Jerome Powell’s hesitancy to raise rates out of deference to financial-system stresses.

“Let me state unequivocally: The Fed’s job is to use monetary policy to achieve its dual mandate, and right now that means raising rates to fight inflation,” Waller said recently. “It is the job of bank leaders to deal with interest rate risk.”[12]

That said, the effort to rein in high inflation with equally high or higher interest rates does come with a risk of “breaking” something within economies and/or the financial system, overall. This can be the cost of winning the inflation battle. We’re going to take a look at some of the signs of stress we’re seeing right now, what the BIS says about them…and why they may not matter.

Rate-Hike Discomfort Could Worsen If Inflation Persists

Generally speaking, prevailing against high inflation can at times come at a heavy cost to an economy.

Since 1961, the Federal Reserve has moved to rate-tightening nine times in order to combat an inflation problem in the U.S. Eight of those efforts have resulted in recession.[13]

Not great odds, if you want to avoid a so-called “hard landing” of the economy. But it speaks to just how challenging and imperfect the battle against inflation often is.

In an article detailing the BIS’s inflation concerns, Reuters notes that the current challenges involved in bringing down inflation “are unique by post-World War Two standards,” clarifying that it’s “the first time that, across much of the world, a surge in inflation has co-existed with widespread financial vulnerabilities.”[14]

One of the most prominent of those vulnerabilities involves the financial system. According to the BIS, “severe stress” has been triggered within the banking system up an average of 15% of the time that rate-tightening cycles are initiated, and that number can be as high as 40% depending on the ratio of private-debt-to-GDP when the hikes are initiated.[15]

It’s not likely that anyone in the U.S. needs to be convinced of that. Since March, the country has seen three of the four largest bank failures in its history. Chair Jerome Powell recently indicated that lingering questions about the banking system’s ability to withstand additional rate hikes played into the central bank’s decision to pause rate hikes earlier this month.[16]

But increased challenges to the condition of the banking system are not the only signs of economic distress resulting from the current global rate-hike regime.

U.K. Homeowners Facing “Mortgage Catastrophe” from Bank of England Rate Hikes

The Bank of England (BOE) is one central bank that has remained steadfast in its efforts to contain inflation. And last week, the BOE raised interest rates by another 50 basis points – a larger increase than had been projected – to put the United Kingdom’s flagship interest rate at 5%. It was the BOE’s 13th consecutive increase, and puts the base rate at its highest level since 2008.[17]

The spate of increases has put significant pressure on millions of U.K. homeowners. A large number of mortgages there are linked to the base rate. According to the National Institute of Economic and Social Research – Britain’s oldest economic think tank – this latest increase will cause more than one million U.K. households to run out of savings by the end of the year. Rachel Reeves, finance minister for the country’s opposition Labour Party, recently went as far as to say that a “mortgage catastrophe” is unfolding in her country right now.[18]

And rate hikes may not be finished in the U.K. On Monday, one day after the BIS released its annual report, Reuters conducted a poll of economists who projected the BOE will boost rates by another 50 basis points next quarter.[19]

Commenting on the rate increases and mounting challenges to U.K. households, BOE Governor Andrew Bailey said recently, “We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”[20]

And that’s the overriding point made by the BIS.

“A shift to a high-inflation regime would impose enormous costs,” BIS general manager Agustin Carstens said during his press conference. “No one would benefit. Higher inflation won’t boost real wages. It won’t deliver growth. It won’t bolster financial stability.”[21]

In the view of the BIS, the pain arising from the fight against inflation would pale in comparison to the pain that will ensue if inflation is not ultimately defeated altogether. This, says Carstens, leaves central banks with only one option:

“The task is clear. They need to restore price stability.”[22]

Learn why thousands of Americans are buying gold and silver for their retirement savings.


[1] Bureau of Labor Statistics, “Consumer Price Index Archived News Releases” (accessed 6/29/23).
[2] Ibid.
[3] Roger W. Ferguson Jr. and Upamanyu Lahiri, CFR.org, “The History and Future of the Federal Reserve’s 2 Percent Target Rate of Inflation” (June 15, 2023, accessed 6/29/23).
[4] Bureau of Labor Statistics, “Consumer Price Index Archived News Releases.”
[5] Megan Henney, Fox Business, “Fed officials signal rates may need to go higher to fight inflation” (June 16, 2023, accessed 6/29/23).
[6] Ibid.
[7] Marc Jones, Reuters.com, “Economy at critical juncture in inflation fight: central-bank body” (June 26, 2023, accessed 6/29/23).
[8] Agustin Carstens, BIS.org, “A time for resolve and realism” (June 25, 2023, accessed 6/29/23).
[9] BIS.org, “Central banks stay the course as inflation fight gets tougher, BIS says” (June 25, 2023, accessed 6/29/23).
[10] BIS.org, “Annual Report 2022/23” (accessed 6/29/23).
[11] Richard Curtin, Barron’s, “Inflationary Psychology Has Set In. Dislodging It Won’t Be Easy.” (April 7, 2022, accessed 6/29/23).
[12] Bryan Mena, CNN Business, “Just days after pausing rate hikes, Fed officials call for more increases” (June 16, 2023, accessed 6/29/23).
[13] Piper Sandler, “How Likely Is a Soft Landing? A Look at History Since the 1960s” (March 25, 2022, accessed 6/29/23).
[14] Jones, “Economy at critical juncture in inflation fight.”
[15] Ibid.
[16] Nick Timiraos, Wall Street Journal, “Fed Holds Rates Steady but Expects More Increases” (June 14, 2023, accessed 6/29/23).
[17] Sam Meredith, CNBC.com, “Mortgage catastrophe brews in Britain as millions are pushed toward insolvency” (June 26, 2023, accessed 6/29/23).
[18] Ibid.
[19] Jonathan Cable, Reuters.com, “Bank of England to take Bank Rate to 5.50% over next two meetings: Reuters poll” (June 26, 2023, accessed 6/29/23).
[20] Meredith, “Mortgage catastrophe brews in Britain.”
[21] Carstens, “A time for resolve and realism.”
[22] Ibid.
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