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Much of the developed world has struggled with a historic surge
in prices over the past two years and inflation pressures have
proven far more persistent than anyone predicted at the onset.
Outlining these new realities, Lagarde said the labour market is
going through profound changes, energy transition creates new
investment needs while a deepening geopolitical divide will lead
to protectionism and supply chain constraints.
"The new environment sets the stage for larger relative price
shocks than we saw before the pandemic," Lagarde told the annual
economic symposium hosted by the U.S. Federal Reserve Bank of
Kansas City in Jackson Hole, Wyoming.
"Whether all these various shifts will prove to be permanent is
not clear at this stage. But it is already evident that, in many
cases, their effects have been more persistent than we initially
expected."
Higher investment needs and greater supply constraints are
likely to lead to stronger price pressures and not all sectors
will be able to absorb these, she warned.
An added complication is that workers now enjoy greater
bargaining power given tight labour markets and firms have
become quicker in adjusting their prices, both adding to price
pressures.
While these changes could still prove temporary, central bankers
need to be open to the possibility that some of them will be
longer-lasting, Lagarde added.
"We will have to be extremely attentive that greater volatility
in relative prices does not creep into medium-term inflation
through wages repeatedly “chasing” prices," Lagarde said.
"That could make inflation more persistent if expected wage
increases are then incorporated into the pricing decisions of
firms, giving rise to what I have called 'tit-for-tat'
inflation."
(Reporting by Balazs Koranyi; Editing by Dan Burns and Andrea
Ricci)
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