Lagarde: US-China split may weaken growth and fuel inflation

The fragmentation of the world economy into rival blocs led by the United States and China threatens to destabilize global commerce, increase inflation and weaken growth, Christine Lagarde, the president of the European Central Bank, warned Monday.

Speaking to the Council on Foreign Relations in New York, Lagarde said that economic data dating to 1900 shows that “geopolitical risks led invariably to higher inflation."

Costs tend to mount, she said, as countries stop or reduce trading with rivals and seek supplies at home or from allied countries. She added that it can be difficult to sever ties: Europe, for example, relies on China for 98% of its rare earth minerals, which are used in cellphones and computer hard drives, among other products.

If world supply chains were to split along geopolitical lines, Lagarde warned, consumer prices could rise 5% in the near term and 1% in the long run.