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Last month, European Central Bank president Christine Lagarde called out the U.S. and China, albeit politely, for thwarting the fight against inflation. She did so in a speech to the Council on Foreign Relations, while highlighting the link between inflation and global political instability.
The forces of inflation and global instability have been at the center of policy and academic discourse for well over a year, but their mutually reinforcing relationship gets less attention. For businesses and investors positioning themselves for the next three to five years, the insight is important — weighing on everything from emerging market debt to the cost of capital to the likelihood of bankruptcies.
Lagarde’s message was this: To achieve price stability will require a multilateral approach that lays a foundation for broader economic stability. She urged the U.S. and China to rise to the occasion and rebuild collaborative ties.
In the April 17 speech, Lagarde highlighted how a lack of global cooperation on things like trade, climate change, economic inequality and digital resources can feed inflation. Conversely, she said, stable relations, especially among the world’s great powers, sets the stage for better inflation management.
Lagarde said: “Central banks cannot guarantee price stability in isolation. They need to do so in the context of an economic environment that is conducive to price stability.”
Lagarde focused on China’s expanding role in global economic governance. The country has become increasingly important in international organizations such as the International Monetary Fund and the World Trade Organization. She emphasized the need for China to continue to engage constructively with these organizations and to play a responsible role in the global economy.
Noting the current tensions between China and the U.S., Lagarde said: “We need a stable and constructive relationship between the United States and China, not just for the sake of those two countries, but for the sake of the global economy.” She urged both countries to work together to resolve their differences, particularly in the areas of trade and technology.
Lagarde initially raised the subject of inflation in the context of the COVID pandemic — noting the massive fiscal and monetary stimulus deployed by governments and central banks in response, (which many cite as a trigger for the current wave of inflation). Now in the aftermath of that stimulus, central banks, including the Fed and the ECB, “must also be careful not to overreact to short-term fluctuations in inflation.”
A full transcript and video of Lagarde’s remarks is available at the Council’s website.