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Inflation fight will take more time, says IMF deputy managing director

DAVID GURA, HOST:

Forget the spectacular Wyoming scenery - hard to do, I know. But what Wall Street cared about this past week in Jackson Hole was high inflation. At an exclusive gathering of some of the world's most powerful economic policymakers, Fed Reserve Chair Jerome Powell acknowledged how hard it's going to be to get it under control.

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JEROME POWELL: While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.

GURA: Economist Gita Gopinath was in the room for those remarks. She's the deputy head of the International Monetary Fund, and she joins us now from the Jackson Lake Lodge in Grand Teton National Park. Gita Gopinath, thanks very much.

GITA GOPINATH: Hi, David. A pleasure to join you.

GURA: Jerome Powell made clear the Fed's goal is to get inflation back down to 2%. In the U.S., it's still near a 40-year high. And I wonder how difficult that's going to be.

GOPINATH: I think there is a recognition that this is not going to be simple. It's going to take time. And that's why he made it very clear that any jumping to the assumption that there would be interest rate cuts coming up very soon is very premature.

GURA: The Fed chair said the burdens of high inflation fall heaviest on those who are least able to bear it. What is this fight going to mean for poor people here in the U.S. and also around the world?

GOPINATH: Inflation is showing up now in energy prices, in food prices. And the poor - for them, this is a big part of their consumption bundle. And so that's why the cost-of-living crisis is particularly hard for them. When you bring inflation down, it comes along with an increase in unemployment rate. So there will be that tradeoff. But we need to bring inflation down durably to make sure that in the long run, in the medium run, everybody benefits economically in terms of employment, in terms of their own welfare.

GURA: You mentioned in your speech how this surge of inflation that we've seen was a surprise to so many who thought it would be over quickly, that it would be transitory. How close are we to understanding why they got this wrong?

GOPINATH: I'd say that the last two years have been incredibly difficult in assessing the amount of imbalance there is between supply and demand. We had the pandemic. We had supply chain breakdowns. We have a labor market that still hasn't fixed itself. So I think we are still very much in the woods in terms of figuring out what the true slack in the economy is or how tight the economy is. And this is going to make monetary policy very challenging over the next year or two.

GURA: You and I have spoken in the past about the uniqueness of the pandemic, and that was before Russia launched its invasion of Ukraine. I think there is a tendency to look to history. The Fed chair brought up lessons learned from the Fed's fight against inflation in the 1970s and the 1980s. How applicable are those lessons from those decades past?

GOPINATH: I think the most important lessons from the past is what happened in the great inflation of the 1970s, when the central bank at that time decided, after seeing one reading of lower inflation, to say that, well, maybe we can take the foot off the pedal. And that then led to much higher inflation, which then took a lot more hardship to bring down. So I think Chair Powell is very right in saying that one good inflation reading, which is I would say what we got in July, is far from enough at this point. They need to stay the course and bring inflation down durably.

GURA: As you look ahead, five years, 10 years, how much do you see the global economy as having changed permanently - that what we've been through with the pandemic, what we're seeing from the fallout in the war in Ukraine is going to lead to permanent changes to the global economy?

GOPINATH: Well, I fear that we are going to be in an environment, at least over the next five years, where supply shocks are going to play a much bigger role in the world. We saw supply shocks that came through rising energy prices, food prices, create a lot of disruption. And going forward, I think there are many reasons to think that these shocks could play a very important role and much bigger role than they played in the past. And another piece that I worry about is that following Russia's invasion of Ukraine, the risk that we will see a fragmentation of global trade, that we will have a situation where there will be many more breakdowns in supply chains and because of which world output and world potential output will be lower.

GURA: Gita, let me ask you about the psychology of inflation. You and Chair Powell both talked about inflation expectations. Why is that so critical, and why do central banks need to both understand that and figure a way to keep that in control?

GOPINATH: So let's think about, for instance, one channel, which is if you expect inflation is going to be 5% next year, you know, when you have your wage negotiations, you're going to expect that you will get a wage increase that's around 5%. And if that actually happens, then firms will feel the pressure to push through those cost increases in terms of higher prices, and that could generate 5% inflation. So that's what we call the wage-price spiral, but it's exactly the kind of situation we want to avoid. When you want the target to be 2% inflation, you really want to be able to make sure that inflation expectations aren't generating these kinds of dynamics that lead to inflation getting out of control.

GURA: Gita Gopinath is the first deputy managing director of the International Monetary Fund. She joined us from Jackson Hole. Thank you very much for your time.

GOPINATH: Thank you, David. Transcript provided by NPR, Copyright NPR.

David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.