Ignazio Visco: Monetary policy and inflation - recent developments

Keynote address by Mr Ignazio Visco, Governor of the Bank of Italy, at the conference on "The multiple role of the central banks: new frontiers of the monetary policy", organised by the Fondazione CESIFIN and the Florence School of Banking and Finance of the European University Institute, Florence, 30 September 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

In the last year or so, inflation has been sparked almost everywhere by the exceptional increases in the prices of energy commodities. However, the ways in which these increases have taken place and their relative weight with respect to other factors differ widely across countries, in particular when comparing the United States and the euro area.

– The most important difference between the two economies probably concerns the fiscal response to the pandemic crisis in 2020-21. Although many countries took budgetary measures on a massive scale to strengthen their health systems and support households and businesses, the measures introduced by the US Administration were exceptionally strong. Over those two years, the debt-to-GDP ratio rose by almost 25 percentage points, to over 130 per cent, against an average increase of less than 15 points in euro-area countries, to around 95 per cent. The support given in the United States had an astonishing effect on households' disposable income, which, in 2020, recorded its highest rate of growth since the mid-1980s, with a 6.2 per cent increase in real terms, against a drop in GDP of 3.4 per cent. In the euro area, instead, household disposable income fell, by 0.6 per cent, though to a much lesser extent than the decline in GDP (6.4 per cent). The inflationary effects of the ensuing overheating of the US economy were amplified by the still partial recovery of global supply due to the recurring pandemic waves, contributing to the creation of bottlenecks in the international supply chains of intermediate goods, with adverse effects on production in many countries.