Source: Jinshi Data

Former Federal Reserve Chairman Bernanke said that the world's recent acceleration of inflation may make it more difficult for central banks to control prices in the future.

Asked at a meeting in Wellington on Thursday, Bernanke said the surge in inflation after the COVID-19 pandemic will undoubtedly affect consumer behavior.

He said, "I think that in some way inflation (surge) makes future inflation control more difficult because, you know, businesses may find it easier to raise prices, you may see consumers more sensitive to inflation, and their expectations may also adjust."

Meanwhile, Bernanke hinted that central bank governors may be more alert to allowing prices to soar again. He cites research that Fed makers in the 1970s (a period when the economy was hit by oil prices) were "overall more hawkish than young people."

"Your grandmother, who lived in the Great Depression, wouldn't she spend money on some luxury goods, right? Always putting savings very seriously," he said. "So people's behavior must have been influenced by their experience. The Germans still remember the hyperinflation of 1923." Bernanke said it was unclear how much this would be.

"It may not be a major issue, we don't know," he said. Nevertheless, “What actually happened is such a big shock to many people, and they don’t understand that this could happen. These things may be related.”

Bernanke led the Federal Reserve from 2006 to 2014, and he was the keynote speaker on the first day of the meeting on inflation targets hosted by the Fed. New Zealand Fed Chairman Orr resigned unexpectedly yesterday.

Bernanke said in his prepared speech that the key lesson learned from the latest round of inflation is that central banks should pay more attention to the possibility that the results may differ greatly from the most likely forecasts, and that if the reality is different from the forecast, the currency will respond appropriately.

For example, he said that in 2021 the Fed focused its public attention on its forecast that inflation is likely to prove temporary.

"When inflation proves not temporary, it hurts the Fed's credibility," he said. "More serious is that the public does not fully understand in advance how the Fed will respond once the basic prediction proves to be wrong."

In hindsight, a better communication strategy may be the Fed's statement that its basic prediction envisages temporary inflation, but a stronger emphasis on other outcomes are also possible, and if these results occur, a summary of how the makers expect to respond.

Bernanke said the same strategy could have been used to preview under what conditions quantitative easing is about to end.