What’s driving the ongoing surge in global inflation, and how long will high prices last?  The panelists discussed supply and demand factors, including the impact of the war in Ukraine, and explored the persistence of rising price pressures.  The panel also weighed in on how central banks can deliver on their price stability mandate in the current environment, while protecting the ongoing recovery.

Key Points:

• Inflation path. The panel concurred that the current path of inflation was very unpredictable, but the upside risks, including from continued supply disruptions and the war in Ukraine, were significant.
• Impact of the war in Ukraine. Gopinath emphasized that ending the war would be the most beneficial outcome for the global economy. Noting that a protracted war could lead to further energy price increases due to potential additional sanctions imposed by Europe, including on Russia’s oil and gas, Gopinath said the war would further weigh on global growth. Nor Shamsiah noted that for many emerging markets and developing countries (EMDCs), including Malaysia, the impact of the war on inflation was much more limited than in the advanced economies.  Continued supply chain disruptions and renewed rise in COVID cases, said Nor Shamsiah, are the main potential drivers of sustained inflation pressures in many EMDCs.
• Monetary policy. Rey noted that monetary policy tightening was necessary at this point, but emphasized the need to be mindful of potential overtightening, highlighting balance sheet risks.  Bailey further underscored there is no one size fits all since each country faces different shocks and calibrate the policy response appropriately. Gopinath indicated the importance of central banks acting swiftly and maintaining good communication to ensure that inflation remains in check and expectations remain well anchored. Under current circumstances, it is instrumental for monetary policy to coordinate with other policies in staving off inflationary pressures, said Nor Shamsiah.
• Policy coordination. Gopinath and Rey saw fragmentation as a major risk, as individual economies becoming more inward looking could lead to further inflationary pressures. Gopinath underscored that in this context, policy coordination was becoming more important than ever. Bailey emphasized the importance of focusing on building resilience, including through maintaining a free international trading system while being careful of building new dependencies, which might become a challenge later.

Quotes:

“One of the clear messages I am getting from this [Spring Meetings] week is that we have to be very focused on resilience.” Andrew Bailey
“The best policy response, also for inflation, would be to end this war.” Gita Gopinath
“We need the tightening at this point, but we need to be very careful about the danger of overtightening.” Helene Rey