European Central Bank head says inflation fight is not won as economy enters "new age"

The big picture: Lagarde's remarks came in a speech that otherwise warned that global shocks — the pandemic, Russia's invasion of Ukraine, climate change and more — may have forever rewired the economy.

What they're saying: "We may be entering an age of shifts in economic relationships and breaks in established regularities," Lagarde said. "[I]f we are in a new age, past regularities may no longer be a good guide for how the economy works."

• One result of those economic shifts is the return of high inflation: "Central banks have responded by tightening monetary policy and, while progress is being made, the fight against inflation is not yet won," Lagarde said.

Between the lines: Lagarde said an era of higher inflation may not be fleeting, for two reasons: firms facing more frequent supply shocks that forces businesses to hike prices, and tight labor markets that may lead to more persistent inflation.

• "We ... need to be open to the possibility that some of these changes could be longer-lasting," Lagarde said.

Of note: Lagarde also commented on the "deepening geopolitical divide and a global economy that is fragmenting into competing blocs," leading to a reconfiguration of supply chains around the globe.

The intrigue: These new dynamics may fade, but Lagarde warns that global central bankers need to consider what happens if that's not the case and what it means for setting policy.

• "There is no pre-existing playbook for the situation we are facing today — and so our task is to draw up a new one," Lagarde said.

Where it stands: The ECB, like other global counterparts, is grappling with how much further to raise rates to conquer inflation.

• Inflation was 5% in the euro area in July compared to the same time last year, down from a peak of nearly 11% last fall.
• Lagarde said the ECB needs to set "interest rates at sufficiently restrictive levels for as long as necessary" to get back to its 2% target.