The risks of a prolonged period of elevated inflation have increased despite the current decline in prices in many parts of the world, Bank for International Settlements chief economist Claudio Borio told the German daily newspaper FAZ on Monday.
“The ‘easy gains’ in bringing down inflation have now been reaped,” Borio said, adding that core inflation — which measures inflation excluding fluctuating prices for energy and food — is “more persistent” and has “stabilized at elevated levels or is even rising.” This makes the next phase of fighting inflation “more difficult” and “requires all efforts,” the economist told the newspaper.
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One of the reasons for this effect, he said, is that people adjust their behavior to higher inflation when it lasts for a longer period of time, which in turn leads to its entrenchment at a high level. This particularly affects the link between higher prices and rising wages, Borio said.
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In the current situation, governments have to make a contribution by consolidating their budgets in order to get inflation back under control. Lower public spending would reduce the pressure on aggregate demand and thus help the central banks to fight inflation, Borio said.
