Profound Changes in Global Economy Could Lead to Greater Inflation Volatility, Says ECB President Christine Lagarde
JACKSON HOLE, Wyoming – European Central Bank President Christine Lagarde warned on Friday that profound changes in how the global economy operates could create greater inflation volatility and more persistent price pressures. Lagarde made these remarks at the annual economic symposium hosted by the US Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming.
Lagarde explained that the labor market is experiencing significant transformations, energy transition is generating new investment needs, and a deepening geopolitical divide is leading to protectionism and supply chain constraints. These new realities set the stage for larger relative price shocks than those observed before the pandemic.
While the duration of these shifts is not yet clear, Lagarde emphasized that their effects have proven to be more persistent than initially expected. Higher investment needs and supply constraints will likely result in stronger price pressures, and not all sectors will be able to absorb them. Moreover, tighter labor markets have given workers greater bargaining power, and firms have become quicker in adjusting their prices, both contributing to inflation.
Lagarde stressed the importance for central bankers to remain open to the possibility that some of these changes may be longer-lasting. She expressed concern about the potential for greater volatility in relative prices to lead to medium-term inflation through wage increases being incorporated into pricing decisions, causing what she referred to as “tit-for-tat” inflation.
It remains to be seen whether these changes will be temporary or permanent, but Lagarde urged central bankers to closely monitor the situation and be prepared for potential long-term effects.
This article is based on a speech delivered by ECB President Christine Lagarde at the annual economic symposium in Jackson Hole, Wyoming. The event was hosted by the US Federal Reserve Bank of Kansas City.
