Central bankers are beginning to congratulate themselves on having wrestled the inflation down reasonably quickly. But the experience should have been a wake-up call, writes the former governor of the Central Bank
Bankers are beginning to congratulate themselves on having wrestled inflation down reasonably quickly. But the experience should have been a wake-up callThe pattern of price increases has disadvantaged lower income consumers more than the rich, because of what they consume. Photograph: Sasko Lazarov/RollingNews.ieIt’s a moment to take stock of the surge of inflation that swept through Europe and the United States following the pandemic.
Not only did higher dollar prices spill over across the Atlantic but, with investors preferring the US dollar with its higher interest rates and as a safe haven, the declining exchange rate of the euro and the pound sterling added to the inflationary impact here. The importance of the exchange rate channel is illustrated by the fact that Switzerland escaped the inflation surge entirely, because its currency too was seen as a safe haven for investors.
Unusually, governments also played a part. Attempts to insulate households from some of the energy price jumps through price subsidies have been more successful than expected. By removing some of the impact of the price spike, governments slowed pressures for wage increases that could have proved counterproductive for workers, without incurring unaffordable, open-ended spending commitments.
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