The Bank of England's chief economist Charlie Bean has warned that record oil prices could kill off the era of cheap goods, making it harder for policymakers to keep a lid on inflation.
Cheap imports from the Far East and eastern Europe have kept the prices of goods down. In spurring greater competition, globalisation has provided a "favourable tailwind to central banks' attempts to hold inflation down," Mr Bean said at the annual gathering of central bankers in Jackson Hole, Wyoming, sponsored by the Kansas City Federal Reserve Bank. Yet he cautioned: "Winds can be changeable and the process may go into reverse at some point. To an extent this may already be happening .... There is no never-ending banquet under the sun."
He pointed to the near-tripling of oil prices over the last couple of years, and the rise in commodity prices more generally, as global demand has rocketed, especially from China's rapidly-growing economy. He called the rise in oil prices the "flip-side" of globalisation. This meant policy makers should not look just to inflation measures that strip out energy costs because they are regarded as less volatile. The focus on measures of core inflation was "highly suspect", as they strip out soaring energy prices while retaining falling goods prices.
Mr Bean admitted that the impact of higher oil prices had been relatively benign because wages and prices have not reacted in the way they did during the oil crisis of the 1970s. That is partly down to policy makers' efforts to prevent an inflationary spiral, but also because of greater competition which means businesses often feel unable to pass on energy price increases to their customers and instead seek to cut other costs.
Another factor is that "workers have less scope to negotiate higher earnings when faced with potential offshoring and actual or threatened use of migrant labour", he said.
Mr Bean argued that while globalisation can bring about swings in the prices of many goods, central bankers still have control of overall inflation. "Globalisation represents a shock to relative, not absolute, prices. What happens to the general price level depends on what monetary policy makers then decide to do." Yet he admitted that increased capital market integration can reduce central banks' leverage over domestic interest rates. "So the impact of policy decisions might become rather less predictable. Certainly maintaining the very high degree of inflation stability that we have seen over the last decade may prove difficult."
In a separate paper, the Harvard University economist Kenneth Rogoff argued that volatility in stock prices and exchange rates had been "perhaps the greatest challenge to monetary policy during the globalisation period."
Ben Bernanke, the Federal Reserve chairman, issued a strong warning against the spread of protectionism at the Jackson Hole gathering on Friday.