“The fight against inflation calls for innovation and not a return to orthodoxy”

FFaced with the return of inflation, there is an attractive interpretation: the period of great moderation and very low interest rates would have constituted an exception since the excess liquidity created by the central banks would finally be reflected in the price statistics to consumption. Consequently, it would be advisable to return as quickly as possible to orthodox monetary policies thanks to a rapid rise in interest rates.

This could be a dangerous error of analysis, because it is the convergence of major structural changes that actually explains the current conjuncture.

First, the pandemic has shown the fragility of global value chains, first in terms of medical goods, but also for many other products including electronic components, which have become essential in the new production paradigm. Once the most acute phase of the pandemic had been overcome, global demand recovered vigorously, revealing the fragility of increasingly interdependent national productive systems, marked by an extreme concentration of the production of strategic goods. Supply constraints are thus reappearing, sources of pressure on prices.

Also read the column: Article reserved for our subscribers Inflation: “The world has suffered from insufficient production in relation to rising demand”

It is not surprising that inflation is the highest in the United States, because the oversizing of support and then stimulus plans foreshadowed either a massive widening of the external deficit, or an inflationary runaway, all the more significant as the economy is very close to full employment and due to the generosity of income support for American households. Belief in the lasting, so to speak irreversible, nature of the stability of the general level of prices has led those responsible for economic policy to consider this return to inflation as purely transitory. The inertia of representations inherited from the previous growth regime has undoubtedly aggravated the extent of inflation.

Central banks are trapped

Secondly, climate change has long been perceived as a phenomenon that would only manifest itself over a very long period. However, the last two years have been marked by an increased frequency of tornadoes, floods, droughts, or even desertification and fires. In short, so many events that have direct repercussions on agricultural production, but not only. Soaring food prices, even before the war in Ukraine, are aggravated by the temptation to block agricultural exports, at the risk of accentuating the fragility of international flows of goods. In return, the uncertainty thus created inhibits investment and accentuates supply problems.

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