Bernanke: Soaring inflation may become a global governance challenge

Former Federal Reserve Chair Ben Bernanke recently stated at a conference in Wellington,Aurora Foreign Exchange Custody New Zealand, that the rapid inflation experienced globally in recent years may make it more difficult for central banks to control prices in the future. He emphasized that the post-pandemic price surge has had a profound impact on consumer and business behavior, potentially making future inflation control more complex.

Inflation Surge Influences Market Behavior, Future Regulation May Be More Challenging

Bernanke noted that the dramatic inflation fluctuations of recent years have altered market behavior, with companies possibly more inclined to raise prices and consumers' resistance possibly diminished. Additionally, as people's sensitivity to inflation rises, they may adjust their own expectations, inadvertently increasing the difficulty for central banks in controlling prices in the future.

He cited examples, stating that policymakers who lived through the oil shocks of the 1970s tend to take a "hawkish" stance to avoid another price surge. "Your grandmother who lived through the Great Depression would never spend on luxury items and was always very focused on saving," Bernanke added. "Even today, Germans remember the hyperinflation of 1923."

Although he mentioned it is still unclear how significant this will become, he warned that the sharp global inflation rise over the past few years has been a huge shock for many, and these factors are likely closely intertwined with policy decisions.

The Fed Should Improve Policy Communication to Avoid Damaging Market Trust

Beyond analyzing the inflation situation, Bernanke also emphasized the need for central banks to improve their communication strategies when formulating monetary policy to enhance market understanding and trust. He pointed out that the Federal Reserve's 2021 public forecast focused too much on "transitory inflation," but when it became clear that inflation was not temporary, this misjudgment harmed the Fed's credibility.

"When inflation proved not to be temporary, it damaged the Fed's reputation," Bernanke noted. More seriously, the Fed failed to clearly communicate to the public in advance how it would respond if the baseline forecast was incorrect.

He suggested that in future policy communications, central banks should not only provide baseline forecasts but also highlight other possible scenarios and outline in advance how to respond under different conditions. For example, regarding quantitative easing policies (QE), the Fed could have explained in advance under what conditions it would end easing policies, rather than adjusting retrospectively, creating uncertainty for the market.

How Should Central Banks Address Inflation Challenges?

Currently, central banks face the dual challenge of curbing inflation while maintaining economic growth. Bernanke's warning indicates that the post-pandemic inflation surge has long-term implications on market behavior and policy-making, and central banks need to be more cautious in formulating monetary policy and improving communication with the market to maintain economic stability and policy credibility. In the future, the transparency of central bank policies and their flexibility in response will be key to addressing inflation challenges.

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