World may be on brink of new inflationary era, says central bank chief

theguardian.com:

The world economy may be on the brink of a new inflationary era with persistently higher growth in consumer prices due to the retreat of globalisation, a leading central bank chief has said.

Agustín Carstens, head of the Basel-based Bank for International Settlements – which is known as the central bank of central banks – said there was a strong risk that prices would rise uncontrollably without a sharp rise in interest rates above existing plans.

In a speech setting out risks for persistently higher rates of inflation, Carstens said higher borrowing costs could be required for several years to curb the risk of spiralling prices wreaking long-term damage on the economies of the industrialised world.

However, his comments are disputed as other experts warn that high inflation will probably choke consumer spending and economic growth – reducing the urgency for significantly higher interest rates.

Data has shown inflation heading towards 10% in several countries, mostly in response to rising gas and oil prices after Vladimir Putin’s invasion of Ukraine. In February, the consumer prices index hit 6.2% in the UK – the highest level since the 1990s. In March, the CPI in Germany and Spain hit 7.3% and 9.8% respectively.

The Bank of England is on course to raise its base rate to 2% next year according to City investors, up from the current level of 0.75% after Threadneedle Street began hiking rates from a record low of 0.1% in December last year.

Last month the US Federal Reserve approved a 0.25 percentage point hike from near zero, the first increase since December 2018, with a signal it plans several more rate rises this year.

Carstens said a trend for manufacturers to cut back extensive global supply chains in response to the