Stating that central banks need to be determined in order to reach the inflation target, International Monetary Fund (IMF) First Vice President Gita Gopinath said that war and pandemic can have lasting effects on inflation when the economy is very strong. Gopinath underlined that in these circumstances, central banks may need to react more aggressively to control inflation.
Speaking at the Jackson Hole Economic Policy Symposium, International Monetary Fund (IMF) First Vice President Gita Gopinath warned central banks about inflation. She stated that the job of central bankers is harder than usual due to the coronavirus outbreak and Russia’s invasion of Ukraine.
Stating that the epidemic and war served as “stress tests” for countries’ monetary policy frameworks, along with important lessons for policymakers, Gopinath explained that the epidemic recovery showed that the warming of the economy poses significant inflation risk, even if it is sometimes an appropriate strategy.
“Inflationary pressures could become much more intense as unemployment falls to low levels and key sectors face supply constraints,” Gopinath said.
“MAY REACT AGGRESSIVELY”
Pointing out that the difficulties in measuring the recession make it difficult to say exactly when inflation will hit, Gopinath noted that risks increase significantly in a hot economy.
Gopinath stressed that policymakers need to adjust how they apply the method of examining temporary supply shocks.
Stating that the epidemic and war suggest that temporary supply shocks can have wider and more permanent effects on inflation when an economy is very strong or when the shocks are very large, Gopinath said that under these conditions, central banks may need to react more aggressively to control inflation.
Gopinath noted that when looking at the next 5 years, an important structural risk for monetary policy is the change in inflation expectations.
Stating that he hopes central banks will be able to bring inflation back to the target in the next few years, Gopinath stated that the risks of inflation to continue at the highest levels of decades and that some inflation expectations may become permanent are significant.
“CENTRAL BANKS SHOULD BE STEADY”
Pointing out that another structural risk is that the total supply will become more uncertain and volatile, Gopinath said that it may become much more difficult to estimate the number of workers in light of the changes brought about by the epidemic.
Emphasizing that climate change and delays in the urgently needed clean energy transition can also raise food and energy prices and increase volatility, Gopinath warned that if countries severely restrict trade, goods and services provided through global value chains may become more expensive or unusable.
Gopinath noted that in such an environment, it would be difficult to control inflation without harming growth, and potential output could decline, especially in developing countries.
“To mitigate these risks, central banks must decisively return inflation to the target and stabilize inflation expectations,” IMF Vice-President Gopinath said.