ʿInflation will keep us busy for a long time to comeʾ

"Separating opinions from facts is not always easy in economics, but it is essential in teaching," says Aymo Brunetti (left) with Fabio Canetg Live Fabrik GmbH

Inflation is not likely to come down again soon, according to Aymo Brunetti, former head of economic policy for the Swiss government. 

“Separating opinions from facts is not always easy in economics, but it is essential in teaching,” he says. 

Now a professor at the Department of Economics of the University of Bern, he teaches the introductory lecture in economics to students “with enthusiasm” – and has been doing so for the past 11 years. How have the students’ demands changed during this time?

“Recently, some students have asked me to talk about alternative economic theories, such as feminist economics and Marxist theories. But it is not that simple,” he says. 

Brunetti wants his students to learn mainstream economics before they reach for fringe ideas. 

“Afterwards, however, it makes sense to talk about alternative approaches, preferably from an economic-historical perspective,” he adds.

Inflation is becoming entrenched

More understanding of economic history might have saved us from the current inflation. In Switzerland, prices recently rose by 3.4% compared to the previous year, in the eurozone by 8.5%. This means that inflation is far from the target value of 2%.

“Just two years ago, the vast majority of economists believed that inflation would quickly fall again,” Brunetti recalls. He said he was very surprised at this consensus. “Probably many economists thought that inflation was a phenomenon of the past.” 

In June 2021, European Central Bank (ECB) economists were still forecasting inflation of only 1.5% for 2022. In fact, prices then rose by 8.6%.

In his former position as chief economist at the State Secretariat for Economic Affairs (SECO), Brunetti was responsible for the government’s GDP forecast. He admits that making economic forecasts is very difficult.

“I’m careful not to criticise the forecasters too harshly,” he says with a smile.

It is also important to note that economic forecasts are usually based on a statistical extrapolation of what happened in the past. This becomes a problem when something rare or unusual occurs – like a pandemic, for example. According to Brunetti, in 2021 and 2022 the central banks relied too heavily on data from the distant past.

So where do we go from here? 

“It will probably be a long time before inflation in the eurozone falls back to 2%,” he says.

The most important thing now, he says, is that inflation expectations remain stable. 

“If inflation expectations rise, then central banks would have to fight inflation at the cost of a severe recession,” he adds.

He is therefore glad that in the meantime the ECB has also made it clear that interest rates will continue to rise. In Switzerland, too, interest rates will probably continue to rise. In addition, the Swiss National Bank (SNB) is letting the Swiss franc appreciate. This keeps inflation low, but leads to high losses for the SNB. Last year alone, the SNB made a loss of CHF132.5 billion. How problematic is that? 

“Of course the SNB cannot go bankrupt,” says Brunetti. 

It has a structural profit potential and is not automatically bankrupt if its equity capital becomes negative. Nevertheless, one must be aware that part of the credibility of a central bank comes from the fact that it is reasonably financed. At the SNB, the equity ratio has recently fallen from 19% to around 7%. This is another reason why Brunetti finds it dangerous when politicians now call for a distribution of profits. 

“The credibility of a central bank is simply gambled away too quickly,” he warns.

Fabio Canetg completed his doctorate in monetary policy at the University of Bern and the Toulouse School of Economics. Today he is a lecturer at the University of Bern. As a journalist, he works for SRF Arena, Republik Magazin and SWI swissinfo.ch, where he hosts the monetary policy podcast “Geldcast”.