The Bank for International Settlements has stated that central banks around the world are forced to maintain high interest rates for many years as they fight wage demands, wars and trade disputes.
The institution often known as central bankers’ central bank warned that “the job is still not done” despite the fact that inflation is declining.
The price rises for services have been “stubborn”, even though inflation of goods has fallen after the supply chain chaos caused by the pandemic, and the energy prices shock that accompanied Russia’s invasion of Ukraine.
The BIS warned central banks that they would have to tighten monetary policy if the price pressures continued in the service industry.
The organisation also warned that there is a long-term danger from disruption of trade routes, and the end to the globalisation wave which helped lower costs in the first years of this century.
Climate change can increase the price of goods through weather disruptions or restrictions on shipping freight on waterways.
Geopolitical tensions may increase these pressures through the reorganization of global value chains. All else being equal, the growth in services prices may need to be lower than what it was during the decade before the pandemic.
In recent years, disruptions have come from a trade conflict between the US and China. Shipping was disrupted during the pandemic. And Houthis attacked vessels in the Red Sea.
In order to combat inflationary pressures within the service industry, central banks may have to maintain high interest rates for many years.
An ageing population will also increase wages, and therefore keep services costly.
Claudio Borio, BIS, said that globalisation might no longer be able to keep costs low.
He said that globalisation had previously kept inflation down by allowing cheap labour from poorer countries to enter Western markets.
Mr Borio said: “This factor has tended to fade over time, and we expect this type of tailwind for inflation to become a backwind.”
Huw Pill said last week that interest rate reductions are still “someway off”, even if the inflation drops below 2pc by spring.
“While I acknowledge that we are seeing early signs that inflation dynamics have shifted downward, these signs remain tentative,” said he, warning that prices for services, wages, and the overall job market do not provide enough evidence that inflation is defeated.
The Bank of England has set a target of 2pc for inflation, but the UK’s is still 4pc. Bank of England’s base interest rate is currently 5.25pc. Policymakers are unsure what to do.
Last month, six members of the Monetary Policy Committee, including Andrew Bailey the Governor and Mr Pill, voted against any change in rates. Two members wanted an increase to 5.5% and another member wanted to cut the rate to 5%.