World is staring down the barrel of new high inflation era, BIS warns

The world risks being flung into a new era of persistently high inflation that will tip the global economy into a drawn out recession, one of the world’s top economic institutions has warned.

Rampant price rises triggered by a series of economic shocks that have no “historical parallels” could become the norm, the Bank for International Settlements (BIS) said today in its annual economic report.

“The global economy could be set for a period of stagflation, involving both low growth, if not an outright recession, and high inflation,” the BIS, which is the central bank for central banks, said.

Stagflation – periods in which growth slows or reverses while prices increase – dangers “loom large,” the report said.

The worst inflation crunch in recent memory has swept across the world’s richest countries in a reversal of stable price growth that has characterised the global economy for the past two decades or so.

In the UK, living costs are up 9.1 per cent over the last year, the fastest acceleration in forty years.

Across the pond, Americans are now paying 8.6 per cent more for goods and services, also the biggest jump in four decades, while Europeans are swallowing the hottest inflation since the creation of the euro in 1999.

Inflation has been dormant for decades, primarily held down by central banks – such as the Bank of England – in the 1990s being given political independence and a sole mandate to keep price rises stable at around two per cent annually.

But, the Covid-19 crisis, disruption to trade flows from China and Russia’s invasion of Ukraine sending commodities prices soaring, have generated new economic dynamics that could upend the period of low-inflation.

The BIS called on the likes of the Bank of England, the European Central Bank (ECB) and the US Federal Reserve to hike interest rates quickly to prevent high inflation from becoming a permanent fixture.

“The key for central banks is to act quickly and decisively before inflation becomes entrenched,” Agustín Carstens, general manager of the BIS, said.

“If it does, the costs of bringing it back under control will be higher. The longer-term benefits of preserving stability for households and businesses outweigh any short-term costs.”

Britain is likely to tip into a recession soon, primarily the result of households cutting spending in response to the cost of living crisis. Analysts at Goldman Sachs have also warned of mounting US recession risks.

Bank governor Andrew Bailey and co are facing a balancing act between taming living costs through policy tightening without dealing unnecessary long-term damage to the UK economy.

Threadneedle Street has already lifted rates from a record low of 0.1 per cent to a 13-year high of 1.25 per cent in the space of six months or so. Markets think UK rates will top three per cent by the end of the year.

Bailey and the rest of the monetary policy committee have been accused of stoking inflation by leaving rates too low for too long.

Fed chair Jerome Powell and the federal open market committee signed off a 75 basis point rise earlier this month, the quickest tightening of policy since 1994. 

ECB president Christine Lagarde confirmed European rates will climb for the first time in over a decade next month.