SINTRA, Portugal — Three of the world’s top central bankers set out a grim prediction on Wednesday: The forces that weighed down inflation for decades before the onset of the pandemic may never return, forcing policymakers to keep up efforts to cool down their economies in a bid to get rapid price increases back under control.
“Since the pandemic, we’ve been living in a world where the economy is being driven by very different forces,” Jerome H. Powell, the Federal Reserve chair, said on Wednesday, speaking on a panel alongside the heads of the European Central Bank and the Bank of England in Sintra, Portugal. Before, forces like young demographics and globalization helped to keep production cheap and price increases slow.
“What we don’t know is whether we will be going back to something that looks more like, or a little bit like, what we had before,” Mr. Powell said. “We suspect that it will be kind of a blend.”
Christine Lagarde, Mr. Powell’s counterpart in Europe, gave an even blunter assessment, saying the low-inflation era that prevailed before 2020 is unlikely to return.
“There are forces that have been unleashed as a result of the pandemic, as a result of this massive geopolitical shock that we are facing now, that are going to change the picture and the landscape within which we operate in,” Ms. Lagarde said, referring to the war in Ukraine, which has sent commodity prices sharply higher.
Andrew Bailey, the governor of the Bank of England, agreed that this was a new period of price increases that policymakers needed to push back against.
Their comments underscored the challenge confronting central bankers as inflation surges across many developed economies. Some of the recent pickup has been driven by strong domestic demand in the countries including the United States, where apartment rents are increasing sharply, hotel room rates are way up and a variety of services have grown more expensive. But shared and unpredictable shocks to supply — including factory shutdowns, shipping snarls, and rising food and fuel costs spurred by the war in Ukraine — are driving a big portion of price increases around the world.
That makes this moment a difficult one for central bankers to navigate. Their tools primarily make money more expensive to borrow, which weighs on demand by making people and businesses less inclined to spend. But they can do little to affect supply.
Even so, officials around the world are deciding that they can no longer wait for shortages to clear up. Central bankers around the world are raising interest rates to try to slow demand to a point where it is more in line with today’s limited supply of goods and services.
It is not clear when normality will return or what it will look like as companies and countries talk about bringing factories closer to home in a turn away from globalization, which had been holding prices down by containing labor and production costs. And critically, rapid price increases threaten to change consumer inflation expectations as they last into their second year. If outlooks about price increases shift, it could make inflation a more permanent feature of the economy by causing households and businesses to approach wage negotiations, spending and pricing decisions differently.
“The risk is that because of a multiplicity of shocks, you start to transition to a higher-inflation regime,” Mr. Powell said. “Our job is literally to prevent that from happening. And we will prevent that from happening.”
As inflation runs at the fastest pace in four decades in the United States, Fed policymakers have been raising interest rates quickly to try to get it under control, including a large increase of three-quarters of a point in June. Central bankers have indicated that they want to raise rates well above 3 percent, compared with their current 1.5 to 1.75 percent range, by the end of the year.
“The aim of that is to slow growth down so that supply can have a chance to catch up,” Mr. Powell said Wednesday. “It’s a necessary adjustment that needs to happen.”
The E.C.B. plans to raise rates for the first time in more than a decade at its meeting in July, and Ms. Lagarde has signaled that when the E.C.B. raises rates rise again in September, it’s likely to be an even bigger increase. This week, she has sent a message that the risk of persistently high inflation outweighs a slowing economic growth outlook in the eurozone.
The Bank of England, which began raising rates in December, has tried to walk a “narrow path” between arresting inflation, which was at a 40-year high of 9.1 percent in May, and concerns about the economy stagnating as living costs including food and fuel prices rise.
But amid signs that wages are rising more quickly than usual in Britain and more goods and services are recording above-average price increases, the Bank of England has opened the door to a more aggressive policy response.
“If we see greater persistence of inflation, that is second round effects, then we will act forcefully,” Mr. Bailey said on Wednesday.
The eurozone and Britain have both experienced particularly large energy price shocks, exacerbated by Russia’s invasion of Ukraine. As energy prices remain high and the war pushes up global food prices, central bankers in Europe are wary of so-called second-round inflation generated by domestic firms setting higher prices, especially in the services sector, and faster wage growth.
As central bankers around the world pull back support, the global economy appears to be hurtling toward a marked slowdown. The Bank for International Settlements warned this week in its annual report that there was a risk of “a stagflationary hard landing” if high inflation lingers, central banks choke off growth and financial markets and indebted companies come under stress.
It is not just international bodies that are concerned.
While the Fed is trying to cool down the American economy without plunging it into a recession, Mr. Powell acknowledged on Wednesday that the central bank’s efforts to slow down consumer and business demand to cool off inflation were “highly likely to involve some pain.”
The risk of a serious downturn has grown more acute as the war in Ukraine keeps commodity prices elevated, ramping up the chances that central bankers will have to stanch growth more drastically to allow constrained supply to catch up and prices to ease.
“It’s gotten harder, the pathways have gotten narrower,” Mr. Powell said of a so-called soft landing. “Nevertheless, that is our aim.”