Central bankers from all over the world are claiming that the fight against high inflation rates will only continue to get more “serious and painful” if certain rates remain how they are currently.
“If we don’t raise rates now, high inflation can stay with us for longer,” said the Bank of England’s Governor Andrew Bailey, according to reports from CNN.
While inflation is slowing down in many countries, after over a year of rising interest rates, it’s still above the 2% threshold that many central banks are trying to avoid. Research has also indicated that while raising interest rates is one of the most useful tools in decreasing inflation rates, the general economy doesn’t see the impact of those changes for at least 12 months after they’re made.
Christine Lagarde, the president of the European Central Bank, recently delivered a speech in which she compared the rise in inflation to a plane flying to a destination, to give the general public an easier understanding of what the economy is currently enduring.
“At the start, the plane needs to ascend steeply and accelerate fast, but as it gets closer to its target altitude, it can reduce acceleration and retain its existing airspeed. The plane needs to climb high enough to reach its destination – but not so high as to exceed it. The airplane is still climbing – and it will keep going until we have enough speed to glide sustainably and land at our destination.”
Central bankers have now seen the impact of the rise in certain rates with inflation. As time has gone on, inflation has remained high, leading to a struggling balancing act for most economic leaders as they try to figure out where they can make adjustments; not doing enough is just as risky as doing too much to get inflation down.
Within the 20 countries that use the euro, consumer prices have risen by 6.1% in May, which was slightly better than the 7% rise they saw in the month prior, however, it’s still high.
Lagarde continued with her plane analogy to explain that if the plane doesn’t climb high enough to a safe cruising altitude, it will experience turbulence that prevents it from reaching its destination; which in the case of the economy would be a 2% inflation rate.
Michael Bordo, an economics professor and director of the Center for Monetary and Financial History at Rutgers University, told CNN that if central bankers don’t figure out a plan soon, the economy will continue to suffer.
“Taking too long to make [a] decision bears its own consequences … The longer they wait, the more tightening it will take to get inflation back down. That’s because research shows that inflation, if unaddressed, could become even more sticky and harder for central banks to control with rate hikes.”
Central banks have struggled to get inflation down, and one of the biggest reasons is due to global economies not responding to rate hikes.
According to reports, the US specifically, service prices are up 6.6% when compared to last year, according to data from the May Consumer Price Index. Last year, prices were also up 5.2% compared to 2021.
These consistent increased rates makes it very difficult for central banks to combat inflation. Banks are continuing to strategize a long term plan that will impact inflation rates for the better, ideally sooner rather than later.
Eric Mastrota is a Contributing Editor at The National Digest based in New York. A graduate of SUNY New Paltz, he reports on world news, culture, and lifestyle. You can reach him at firstname.lastname@example.org.