The economist Lucrezia Reichlin
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“What we’re going through probably is the most complex and serious economic, geopolitical and social crisis which I have happened to witness in the course of my life “. He does not mince words in describing the difficulties of the moment Lucretia Reichlineconomist (she was Director of Research at the ECB during the tenure of JeanClaude Trichet) and academic who has taught in some of the most prestigious European universities, from the Université Libre of Brussels to the London Business School.
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In June, inflation peaked at 8.6% in the Eurozone and 8% in Italy. How long will such a consistent phenomenon last?
«Before answering this question, it should be noted that although the upward trend in prices is a global phenomenon, the inflation rate is not the same in all countries. For example, in Japan we are just above 2.4% per annum, in China at around 2.2%. High inflation mainly affects the United States, Europe and some emerging countries such as Brazil and Turkey but for specific reasons ».
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Was there an underestimation of the rekindling of the price race by central banks?
“Perhaps initially there was a delay in the response, especially from the Fed in the United States. But we must remember that even in December 2021 medium-long term inflation expectations in Europe were below 2% ».
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So the phenomenon suddenly exploded…
“In part, yes, and at a time when the global economy was emerging from the Covid emergency, Russia’s war of aggression against Ukraine unleashed, accentuating them, the dynamics of growth in the prices of raw materials and in particular of ‘ energy which are the main cause of the price increases of all other goods ».
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If the Russian-Ukrainian war ends within the year, then, inflation could go down …
“I’m not that optimistic. I fear that the conflict will continue over time and the problems related to the energy supply chain will persist for a long time. The answer cannot be to rekindle coal-fired power plants because governments need to keep the bar straight on the energy transition and decarbonisation ”.
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One of the main components of current inflation is the rise in food prices. How much of the price increase is due to drought?
«This is a further long-term problem that makes us understand how essential it is to maintain firm energy policies aimed at reducing carbon emissions. We are experiencing what climate change means in concrete terms ».
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In the face of long-term trends that are difficult to counter, what can central banks do?
“The role of central banks in this phase is important but given that inflation originates mainly on the supply side, monetary policy has a limited effect”.
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Are you saying there is no point in raising interest rates?
«No, it is essential that central banks act immediately and promptly to counter the growth in inflation expectations in the medium and long term. A delay in deciding on a more restrictive monetary policy today could require even more substantial rate hikes in the future ».
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The rate hike will have a recessive effect …
“And this is the very high bill that we have to pay in the fight against inflation. I think that thanks to the economic slowdown, I prefer not to talk about a recession, in 2023 we will have a lower rate of price increase than the current one. So at the cost of a slowdown in the economy, this phase of so high inflation could end or slow down as early as the second half of 2022 and from 2023 “.
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This will happen with very high social costs …
“Of course. And it becomes the task of governments to alleviate the difficulties especially for those sections of the population most exposed to the rise in the price of essential goods. Not so much by setting limits on price increases, which are not very effective, as with direct additions to the income of the people who need them most ».
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Could setting a gas price cap, as proposed by President Draghi, help?
«This is a measure aimed at especially affecting Russia and the details of which are very complicated to design and put into practice. And in any case, even if justified, it could imply a rationing of the quantities of gas ».
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Is an increase in public spending inevitable?
“Yes, moreover, the situation of the most fragile countries in terms of debt is particularly delicate and solutions will have to be found that will allow to contain public deficits and the increase in spreads on the yields of the bonds of the most indebted countries”.
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