BIS Says Global Inflation Fight Now at 'Critical Juncture'

Central banks around the world need to continue to raise interest rates, according to the Bank for International Settlements (BIS). That call for action was delivered via a recent BIS report, which asserts that the global inflation fight is not over.

BIS general manager Agustin Carstens suggested in the report that price stability needs to be prioritized over growth. "The global economy is at a critical juncture. Stern challenges must be addressed," he said. He also pointed to a need for consolidation of fiscal policy as the world’s governments try to win the global inflation fight.

The global inflation fight and the risk of an inflationary psychology

BIS monetary and economics head Claudio Borio warned that an inflationary psychology may settle in. According to the report, that occurs when “wage and price increases start to reinforce each other.” That can lead to even higher interest rates as buying behavior actually begins to increase inflation. As Investopedia describes the phenomenon:

“Inflationary psychology can become a self-fulfilling prophecy, because as consumers spend more and save less, the velocity of money increases, further boosting inflation and contributing to inflationary psychology.”

Signs of that psychology may have already started to appear. Reuters notes that the impact of inflation on living standards has forced workers to demand wage hikes. Meanwhile, many companies have been focused on bosting their profits during the current inflation spiral.

The BIS report warned that there is a “material” risk of further damage to the banking sector the longer inflation remains stubbornly high. That’s because continued high inflation could lead to even tighter central bank policy.

Borio said the world’s central banks will eventually win the global inflation fight. However, he was less confident about what the ultimate cost of that victory might be.