Have central banks really helped slow inflation?

Sometimes praised in the press for being on the verge of succeeding in their "bet" against rising prices, central bankers, including the European Central Bank (ECB) which meets on Thursday and plans to lower its rates this summer, are also making the subject to strong attacks.

“The credit for this success does not go to the American Federal Reserve (Fed) and central banks around the world,” wrote Nobel Prize-winning economist Joseph Stiglitz in an article published in January in the journal The American Prospect.

According to the left-wing economist, "it is not thanks to the action of the Fed that the prices of cars, oil, foodstuffs or other goods affected by shortages have fallen, but because these shortages have been at least partially resolved", and were the source of inflation which he describes as "transient".

However, he points out, interest rate increases are ineffective when inflation comes from an energy shock or blockages in global supply chains, two crises that occurred with the Covid pandemic and the war in Ukraine.

Rate increases have no effect on these exceptional situations, but they do have an effect when it comes to cooling an economy threatened by overheating: higher rates make it more expensive to grant credit for businesses and households and encourage them to consume less.

Ultimately, this tightening leads to a slowdown in the economy which could lead to a recession, which brings down inflation. But this time the economy was not overheating, and inflation still fell.

“Secondary importance”

“What they did went in the right direction for sure, but the effects were only of secondary importance,” Alan Blinder, professor of economics at the university, told AFP. American Institute of Princeton, which also highlights the two shocks to the world economy as the main reason for inflation.

“The irony is that they get more credit than they deserve for bringing down inflation, after being overly blamed for letting it get out of control,” he adds, in start of the energy crisis in 2021.

The origin of the inflationary crisis is still debated today, with some judging that it was essentially fueled by the energy crisis and supply problems, supply factors, while others also link it to the demand, materialized by the generous budgetary support linked to the pandemic.

In this debate between theorists of "transitory" inflation linked to external shocks versus "permanent" inflation, the latter insist on the fact that without resolute action by central bankers, inflation would have spiraled out of control.

Wage increases

Households and businesses “would have anticipated that inflation would remain high and spread throughout the economy,” defended Benoit Mojon, head of economic research at the Bank for International Settlements (BIS). , in December.

The workers would then have demanded “even higher wage increases”, he continued, commenting on a study by the institution based in Switzerland and whose shareholders are central banks.

Thanks to the very firm tone of these managers, salaries remained under control and made it possible to avoid an inflationary spiral, where salary increases fuel inflation, a situation observed in the 1970s, say defenders of the banks power stations.

So, who is right ? In a study, the Allianz Trade company estimated that the American central bank contributed 45% to the slowdown in inflation, while the rest came from standardization on production chains across the planet, a comparable percentage. regarding the other main central banks.

“We can analyze it by saying that everyone is somewhat right,” economist Maxime Darmet, author of the study, told AFP. “But also by saying those who think that inflation was only transitory are completely ignoring the impact of central banks.”