By Marc Jones

LONDON, (Reuters) – The global economy is now facing a period of increased inflation and higher interest rates due to deteriorating ties among the West, Russia, China and COVID effects.

Inflation is at an all-time high in many developed economies. The rise in global energy and food costs has caused it to reach 60%. That’s the biggest increase since 1980. However, more than half the developing countries have an inflation rate of over 7%.

Major economies such as the United States, Britain and other less developed countries are raising interest rates at historic lows. However, it would take a radical paradigm shift to see a significant acceleration.

“A key message is that we may be on the cusp of a new inflationary era,” the general manager of the BIS central bank umbrella group, Agustín Carstens, said on Tuesday.

Carstens said, “We must be open to changing the inflationary climate fundamentally.” Central banks will also need to change if I am correct.

The war in Ukraine was accelerating this thesis, causing a rebound in commodity, food and energy prices. Both the pandemic as well as trade wars have caused disruption to supply chains. Rising living costs also mean that workers demand higher wages.

It is also possible that expectations from consumers, financial markets and businesses regarding how high inflation will be are “unmoored”.

Carstens cited professional forecasts that now predict inflation exceeding 4.5% in America and Europe in the next two-years, as well as over 3.5% for many advanced economies.

Rising inflation is global trend: https://fingfx.thomsonreuters.com/gfx/mkt/klpykjjazpg/Pasted%20image%201649169022463.png

This would mean that policymakers will need to shift quickly their mindsets to prevent inflation from spiraling out of control. A problem many have struggled with since the 1970s.

Carstens acknowledged that this could lead to real interest rates rising above neutral, but said it was most likely.

He said, “But central bank have been there before.” They are well aware of the fact that short-term activity and employment costs are a price they must pay in order to prevent bigger expenses down the line.

He exhorted governments to resist temptations to counter inflation or to raise interest rates.

Carstens stated that “expansionary fiscal or monetary policy is not the key to sustainable higher growth.”

“Many of today’s economic difficulties are due to the failure of supply side policies during the last decade or so.”

Rising inflation expectations: https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnmmkrpq/Pasted%20image%201649167654979.png