We Now Understand How Little We Understand About Inflation – Fed’s Powell
The current high levels of inflation in both the US and Europe have given central bankers an opportunity to “understand better how little we understand about inflation,” US Federal Reserve (Fed) chair Jerome Powell said.
Speaking at the European Central Bank’s (ECB) Forum on Central Banking in Portugal on Tuesday, Powell admitted in his comments that central banks during and before the COVID-19 pandemic did not fully understand inflation and what causes it.
Powell said that the current high levels of inflation were not predicted by economists and the models they used, which he said were largely based on the Philips curve.
According to Powell, nearly all forecasters expected an inflation level below 4% for last year. However, they were all using the same Philips curve model, which he said “was just not capable of producing high inflation.”
We’ve been in a world where inflation wasn’t a problem, but things changed after the pandemic, Powell said, while noting that we’ve had a “series of supply shocks,” which ultimately has led to “very high inflation.”
Making things worse, the war in Ukraine has “added tremendously” to inflationary pressures in food and energy commodities, the Fed chair added.
The same view was also shared by Agustín Carstens, General Manager of the Bank for International Settlements (BIS), who said during the same discussion that central banks still don’t fully understand inflation.
“We understand inflation a little bit better now, but not fully,” Carstens said.
Commenting on how the Fed will now work to bring inflation back down, Powell made it clear that although “we can affect the demand side, we can’t affect the supply side, really.”
Powell further said that growth will need to “moderate” in order for
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