The disinflation process is proceeding according to plan, but there is no room for relaxation yet. Central bankers should be prepared for any unforeseen events related to war outbreaks and political instability. This is, in short, the content of the speech by the governor of the Bank of Italy, Fabio Panetta, during an event in Helsinki organized by the Finnish central bank. To date, price stabilization seems within reach and to reach the 2% target “it is only a matter of time”, so patience is needed. “The disinflation process is now well underway”, observed the governor, a member of the Governing Council of the European Central Bank. Inflation has fallen from a peak of 10.6% in October 2022 to 2.6% last May and the speed of the decline has been unprecedented”. One of the risks that the euro area may encounter in the medium term, however, “is another wave of geopolitical shocks. It is now clear that diplomatic and military clashes between countries can have dramatic effects on trade, capital flows, growth and prices,” the governor added. “Central banks should be ready to deal with the consequences of such shocks, if and when they materialize. This includes a willingness to use the full range of tools at their disposal to adjust the monetary stance.”
But if on the global front – think of what is happening in Ukraine and the Middle East – we have now been living with potential risks for at least two years, the post-European election period has brought with it another possible instability for the Eurozone and its prices: the political one. Two proven examples are France, where President Emmanuel Macron has unexpectedly called elections to be held in a few days, and the United States where the presidential elections will take place next November. «Some of the major world economies have elected or will elect their leaders in 2024 – continued the number one of Bank of Italy – and the political change physiologically translates into political uncertainty: families and investors must get an idea of how the incoming governments will manage many critical economic and political decisions”. It is difficult, even now, to imagine how much and how any political upheavals could influence inflation: the uncertainty, in fact, could even disappear without consequence. However, it is also true that it can “trigger capital outflows and currency depreciations, creating upward pressure on prices.
But it could also shake confidence and weaken demand, halting or even reversing the fragile recovery we’ve seen so far. In short, we know we don’t know.” In short, the time to relax has not yet come.
