The world economy may be on the brink of a new inflationary era with persistently higher growth in consumer prices due to the retreat of globalisation, a leading central bank chief has said. Agustín Carstens, head of the Basel-based Bank for International Settlements – which is known as the central bank of central banks – said there was a strong risk that prices would rise uncontrollably without a sharp rise in interest rates above existing plans. In a speech setting out risks for persistently higher rates of inflation, Carstens said higher borrowing costs could be required for several years to curb the risk of spiralling prices wreaking long-term damage on the economies of the industrialised world. However, his comments are disputed as other experts warn that high inflation will probably choke consumer spending and economic growth – reducing the urgency for significantly higher interest rates. Data has shown inflation heading towards 10% in several countries, mostly in response to rising gas and oil prices after Vladimir Putin’s invasion of Ukraine. In February, the consumer prices index hit 6.2% in the UK – the highest level since the 1990s. In March, the CPI in Germany and Spain hit 7.3% and 9.8% respectively. The Bank of England is on course to raise its base rate to 2% next year according to City investors, up from the current level of 0.75% after Threadneedle Street began hiking rates from a record low of 0.1% in December last year. Last month the US Federal Reserve approved a 0.25 percentage point hike from near zero, the first increase since December 2018, with a signal it plans several more rate rises this year. Carstens said a trend for manufacturers to cut back extensive global supply chains in response to the pre-pandemic trade war between the US and China and, more recently, sanctions on Russia, meant production costs would be higher for a longer period than central banks and independent economists currently estimate. “What starts as temporary can become entrenched, as behaviour adapts if what starts that way goes far enough and lasts long enough. It’s hard to establish where that threshold lies, and we may find out only after it has been crossed,” he said. Carstens’ speech in Geneva challenges the outlook put forward by the Bank of England, which estimates that inflation should begin to fall next year after only a modest rise in interest rates. Earlier this week, the Bank’s deputy governor, Jon Cunliffe, suggested comparisons with the 1970s when inflation was persistently higher were unrealistic. He said changes to the UK labour market since the 1970s – when trade union membership was at its peak – meant workers do not have the same power to demand higher wages to compensate for higher inflation. This would make it unlikely for the UK to experience a wage-price spiral, whereby workers demanding higher pay leads companies to raise their prices. Unlike Carstens, who said there was a risk of high inflation becoming entrenched in the public consciousness, Cunliffe said there were few signs of this so far. “I do not think we are yet seeing a psychology of persistently higher inflation emerge,” he said. “I am not at present convinced that we will inevitably have to lean heavily and constantly against an embedding of an inflationary psychology.”