“we will succeed in bringing inflation down to 2% in the medium term”
At a conference, Jean-Claude Trichet conditioned the return to a reasonable level of inflation on a continued determination of central banks to achieve the set target of 2%. According to the former governor of the Banque de France, recessionary effects are, on the other hand, inevitable.
He was in place of Christine Lagarde almost 15 years ago when the financial crisis hit Europe. A follower of competitive disinflation and an enthusiastic defender of the goal of inflation around 2%, Jean-Claude Trichet gave a conference on Monday morning to discuss the economic outlook and the consequences of rising prices affecting several months advanced countries and more generally the whole world.
“I am sure that we will succeed in reducing inflation to 2% in the medium term, that is within three years, if the determination of the central banks remains clear and visible and if there is a belief in their own credibility, said the former president of the European Central Bank (ECB). directors.”
Inflationary pressure has been virtually non-existent for over 12 years
The former governor of the Banque de France first returned to the inter-crisis period, between the bankruptcy of Lehman Brothers and the coronavirus pandemic, which, according to him, explains the strong return of inflation. This period of a dozen years was marked by particularly weak inflationary pressure. Most countries, and especially advanced ones, have shown low growth potential, inherited from the great financial crisis.
Other factors also played their role, such as the acceleration of globalization in the optimization of the division of labor and the emergence of very low countries, first and foremost China. The financial crisis particularly damaged household confidence, resulting in excessive savings and extremely low interest rates maintained by expansive monetary policies.
“We felt it was eternal and had the naive belief that we are now in the perspective of very low inflation, recalls Jean-Claude Trichet. We tipped in the middle of the year with an inflection point that corresponds to the post-Covid recovery .”
Avoiding deflation has long been a priority
This post-Covid recovery acted as a trigger as demand, which had been “inhibited” for a long time, exploded. Major central banks have lagged behind in implementing anti-inflationary measures precisely because of this legacy of monetary policies implemented over the past decade. “It is always difficult to make 180 degree changes, recognized one who is now a member of the Academy of Moral and Political Sciences. In the long term, the main perceived risk is the materialization of deflation.”
Causes related to long-term structural changes also intervened in this return of inflation, starting with deglobalization due to the consideration of the risk of the destruction of advanced countries in certain areas. “In the United States, a real capacity for negotiation appeared on the side of the unions, with the Republicans as a symbol, which appeared as the party of blue collar workers and not just big business”, added Jean -Claude Trichet. Finally, the war in Ukraine was clearly a decisive factor.
Problem with the model?
The member of the Institut de France also points out the dominance of neo-Keynesian models in the fields of decision-makers. “They reflect what happens in normal times or weak structural changes but underperform when there are rapid changes, he estimated. After the bankruptcy of Lehman Brothers, the size of the recession was greatly underestimated for example. Recently, the models suggested again. not to overreact but you have to make a judgment based on what the real economy is actually saying.”
The former president of the ECB pleads for the independence of conventional monetary policies, which act on the main interest rates, and the unconventional ones, which correspond to the purchase of negotiable securities in the markets. “The two central banks waited until they were done with purchases of securities to raise interest rates,” he lamented.
Reasons for optimism
If Jean-Claude Richet seems confident, it is mainly due to the sharp increase in key rates decided by the Fed and the ECB in recent months, which testifies to the firm desire to reaffirm the inflation objective to 2 %. Long established within the euro zone, the United States and Japan also adopted it ten years ago. “The risk of deflation is too great if we aim for inflation close to 0, explained Jean-Claude Richet. Some economists advanced a figure of 4% but they were not followed because it could lead to acceleration mechanisms of inflation that can be punishing. the hardest”.
“The four main central banks have the same goal and I consider this encouraging, he mentioned. In fact, this is the main reform of the international financial system that we have been able to record since the Bretton-Woods agreements . in 1944.”
While inflation in the euro zone over a year reached 10.7% in October against 7.7% for the United States, the former governor of the Banque de France prefers to base himself on the underlying inflation erasing the exogenous disturbance unrelated to the economic cycle. The increase in prices was almost identical between the two geographical areas, at 6.4% in Europe and 6.3% in the United States. “The underlying inflation has increased in Europe in a very regular and linear way since July 2021 when it was at 0.9%, he underlined. It was at 2.7% in December 2021 then 2.9% in February 2022 before the war in Ukraine. This is the phenomenon that must be prevented.”
Inaction is the worst solution
If the reaction to rising prices is somewhat late, it is not as late as in the 1980s when inflation rates reached 14% across the Atlantic and necessitated an increase in key rates. up to 20% under Paul Volcker’s rule. “There are recessionary effects that cannot be avoided, stubborn Jean-Claude Trichet. If the central bank considers that the fight against them is its main objective, it helps to maintain inflation. The absolute main objective is to avoid the effects of the second round.”
For this, the former president of the ECB hopes that a large number of companies and suppliers will quickly understand that they should not reason on the basis of an inflationary spiral that will last. Furthermore, it encourages the use of bonuses instead of indexing wages to inflation, which inevitably leads to recession.