IMF chief economist Pierre-Olivier Gourinchas: ‘Inflation is proving more persistent than we expected’

The strength of U.S. and eurozone economy despite inflation and interest rate rises has surprised many international organizations, research services and governments. Unemployment is at historically low levels. Even so, central banks are warning of difficult times ahead: more restrictive monetary policy and more of a slowdown. Chief economist at International Monetary Fund (IMF), Frenchman Pierre-Olivier Gourinchas, spoke to EL PAÍS during the annual European Central Bank (ECB) forum in Sintra, which has sought to drive home this message. Gourinchas, 55, assumed the position in 2022, when inflation began to rise. He thinks avoiding a recession will be difficult, but defends the need to bridle demand.

Question. IMF deputing managing director, Gita Gopinath, has spoken in a hawkish tone in this forum. ECB Chief Christine Lagarde’s message has been very similar. Should monetary policy remain restrictive no matter what? Isn’t the risk of a recession both in the U.S. and in the eurozone too high?

Answer. We are not talking about a restrictive “come what may” policy. Right now, inflation is down in the U.S. and the eurozone because energy and food prices are down, but core inflation [which excludes both costs, which are more volatile components] has not been coming down that much, so it’s soon to draw conclusions. Inflation has been too persistent for too long, so perhaps this tightening has not done enough and needs to stay that way for longer. Everything will be data dependent. But we have to be prepared for the fact that monetary policy will have to remain tight, maybe for longer than we expected because inflation is proving more persistent than we expected.

Q. How much longer?

A. The projections speak of 2025, not before. That’s already quite a bit of time. This is an interesting point, because some market participants have underestimated the monetary policy path, and also inflation, they have been too optimistic. I think here [in Sintra] part of the message is: look, we’re going to have to keep rates high for a while. We’re not about to cut interest rates anytime soon. As for the risk of recession, the resilience shown by the U.S. economy is interesting: unemployment is at historical lows we haven’t seen in multiple decades, a little bit less than two jobs for any job vacancies for an unemployed worker. The economy is still growing, maybe even more strongly than was expected. there could be a recession scenario, but we are not we are not near it right now.

Q. Do you think it’s possible to combat inflation without causing a recession?

A. It’s a very narrow path. It’s possible, but it’s going to be difficult because I think we may need to cool off the economy more. European economies are already slowing down. The U.S. economy may need to slow down even further. So I think it’s possible, but I think it’s difficult.

Q. For the eurozone as well?

A. It’s probably going to be more difficult for the eurozone than it would be for the U.S.

Q. There has been a lot of talk about the role corporate profits have played in driving up prices. According to the ECB, two thirds of domestic inflation in 2022 is due to company margins. Do you agree with the idea of “greed inflation” being discussed right now?

A. It is true that there is a very strong component of corporate profits in inflation. Although I would make a distinction between firms that take advantage of inflation to try to inflate their own prices, for which we have little evidence, versus another process, which I think is very much at play, which is that we have very strong demand against a limited supply, which clearly drives up prices. What we have seen in the U.S. and in Europe is prices rising earlier than wages, so if demand rises and prices rise, but wages do not, the profit margin of companies will grow. The good news is now wages are going to start rising, they’re going to be catching up [with respect to lost purchasing power] and businesses have the capacity to let these wages increase without having to raise prices, because they have increased margins. These margins can go back to historical levels, and they don’t need to trigger another wave of price inflation. We’ve had a two-step process. I don’t agree with the view that we should be worried when wages increase, but we should not be worried when profits increase either.

Q. There are many people having a hard time due to inflation, and tight monetary policy is going to take a toll, especially on families and small businesses. Shouldn’t governments do something?

A. Well, there are a lot of things that governments can do and have been doing during the pandemic and energy crisis. Governments have a role to play in providing support to vulnerable families. But the important thing here is to make sure that these measures are targeted so that they go to households that are really vulnerable and not others that can handle the increase in prices. Our advice is that these measures have to address a particular problem for a limited duration. They should try to distort markets as little as possible The energy crisis is by and large behind us and the problem before us is inflation, so policies should focus on that.

Q. We have experienced a wave of populism. Are you afraid of a reaction, of a shift towards a more closed and protectionist model? The Inflation Reduction Act (IRA) that the Joe Biden administration approved, for example, incorporates several defense measures for local industry.

A. I certainly hope that doesn’t happen, although there is a risk that these dynamics will escalate. The Inflation Reduction Act in the U.S. is very welcome in terms of putting the U.S. back on track for the green transition. A lot of spending is directed towards it. Now, some components of the law, such as local content requirements, can potentially distort international trade. The danger, for instance, would be that in response to the IRA, other countries might start putting in place other measures on their own that would also have a protectionist component. And then we would be gradually undoing a lot of the benefits from global trade that we’ve put in place in the last 50 years and that have been very important for the growth of the global economy. It is a serious risk for the global economy, and we have to be vigilant to make sure can address common challenges, such as the climate, together.

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