Soaring global inflation may be a good sign
Price hikes are increasing in many advanced economies as consumer demand, shortages and other factors related to the pandemic combine to fuel a surge in inflation.
The spike has become a source of annoyance for consumers and concern for policymakers who fear rapid price increases will continue. This is one of the main factors central bankers consider when deciding when – and how quickly – to return monetary policy to normal.
Most policymakers believe the current rapid inflation will subside. This expectation may be bolstered by the fact that many economies are experiencing price spikes in tandem, even though they have used very different policies to cushion the brunt of pandemic lockdowns.
The shared experience of inflation underscores that the mismatches between what consumers want to buy and what businesses are able to supply contribute to higher prices. While these may be magnified by global stimulus spending, they are not the simple result of country-specific policy choices – and they should eventually work themselves out.
“There is a lot of stimulus in the system, and that drives up demand and that drives up inflation,” said Kristin Forbes, an economist at the Massachusetts Institute of Technology and former external member of the Monetary Policy Committee of the Bank of England.
“Some of these great global movements tend to pass and prove to be temporary,” Ms. Forbes said. “The big question is, how long will these pressures on the supply chain last? “
The U.S. Federal Reserve’s preferential price index rose 4.2 percent in July from a year earlier, more than double the central bank’s 2 percent target, which it seeks to average over time. In the euro area, inflation has recently accelerated to its highest level in about a decade. In Britain, Canada, New Zealand, South Korea and Australia, price increases have far exceeded targets set by central banks.
The large increases have come as supply chains have mushroomed around the world, raising transportation costs and upsetting the delicate balance of corporate globalization. Prices for airline tickets and hotel rooms fell into the depths of the pandemic last year, and now they are bouncing back to normal levels, making the numbers look higher than they would be. if we compared them to a less depressed base. No problem should go on forever.
There is a risk that the global price spike will last longer – and become more country specific – if workers in countries with high inflation today negotiate wage increases and accept more consistently higher prices. Bringing entrenched inflation back under control may require painful monetary policy responses, which could push national economies back into recession.
Given these high stakes, the mere possibility of sustained inflation intensifies pressure on central banks around the world to consider reducing their still substantial monetary policy support – although many are yet to fully recover. and that the pandemic is not over.
Economies around the world are growing rapidly this year, in part because of huge government spending that has injected some $ 8.7 trillion into advanced Group of 20 markets since January 2020 and central bank policies that have made very cheap money to borrow and spend. Central banks bought bonds to maintain long-term interest rates and keep short-term borrowing costs near or even below zero.
It’s not just higher prices that advanced economies have in common. Complaints about labor shortages in certain fields are also increasing around the world. Job vacancy rates have increased in the construction, leisure and hospitality and information technology sectors in Europe. In Britain, companies complain widely about labor shortages, and a shortage of truck drivers caused in part by the country’s exit from the European Union has disrupted supply chains and fueled shortages milkshakes at McDonald’s and peri-peri chicken at Nando’s, a restaurant chain famous for the dish.
These generalized trends highlight the quirks of the current economic moment. Trade suddenly came to a halt and then rebooted sharply as government relief payments filled consumers’ wallets, making people eager to spend even as manufacturers struggled to return to full production and restaurants scrambled for recruit staff.
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Yet some central bankers are increasingly nervous about their policies in countries with higher inflation and labor supply issues starting to drive wages up. They fear that a cocktail of low interest rates and large government bond purchases will fuel the temporary fire of inflation, helping asset and consumer prices to stay higher. Prominent commentators, both in the media and in the financial centers of the City of London on Wall Street, have added to the chorus saying central bankers are “behind.”
In Britain, Michael Saunders, a policymaker, has already voted to end the central bank’s bond buying program, predicting that part of the rise in inflation would not be temporary. A few European central bankers have indicated they should start debating slowing down their pandemic-era stimulus buying program, and at least one even suggested an immediate slowdown. Some U.S. officials, including Federal Reserve Bank of St. Louis chairman James Bullard, have said current inflation may not completely subside and policy should be ready to respond.
The most worried are in the minority. Most policymakers in advanced economies are betting that price increases will be temporary and that inflation could even return to uncomfortably low levels in the long run. From Ottawa to Frankfurt, they cautioned against overreacting.
“While the underlying global disinflationary factors are likely to change over time, there is little reason to believe that they have suddenly reversed or abated,” said Jerome H. Powell, Chairman of the Fed, during a recent speech. “It seems more likely that they will continue to weigh on inflation as the pandemic goes down in history.”
Before the pandemic, advanced economies had spent years trying to drive up inflation, trying to stop a downward spiral damaging to the economy that had started to take hold.
The slow rise in prices may sound like good news to people buying gasoline, chopsticks or hot dogs, but inflation counts in interest rates, so its downward trend in the 21st century. century left less room for policymakers to cut rates to save the economy in times of turmoil. This has helped weaken recoveries, driving inflation even lower and fueling a cycle of stagnation.
Even in the midst of the reopening, Japan – a notable outlier among advanced economies – continues to wage this long-term war, battling outright drop in prices. Coronavirus outbreaks have kept shoppers home, weighing on prices for Uniqlo clothing and snacks. Persistent forces such as an aging population have also dampened demand and limited the ability of businesses to charge more.
Other economies are expected to revert to their trends of slow growth and low inflation as the pandemic shock wears off and an aging population becomes a more dominant force, said Jay Bryson, chief economist at Wells Fargo .
“It’s like going up the ladder,” Bryson said. “Once you take the next step, the rate of increase decreases. This is a one-time price level adjustment due to the pandemic. “
If inflation eases off as policymakers expect, the current surge could actually offer benefits: in the United States, it has helped push back inflation expectations from the dangerously low zone to historically consistent levels. with healthy price increases. It has proven more difficult for central bankers to push prices up than it is for them to cool them down, so opportunistic inflation could help the Fed set its longer-term price targets. .
But if it takes too long to disappear, the consequences could be more serious.
“If I’m wrong and inflation gets out of hand, it will cause slower economic growth in the longer term,” Bryson said, explaining that high inflation tends to rebound a lot, making it more difficult. enterprises. plan and invest.
But he said that even if higher prices last, they could settle at 2.5% or 3%, which would not pose any significant problems. In contrast, inflation in the United States rose to double digits during the Great Inflation of the 1970s.
“I don’t think we are talking about inflation the 1970s way,” agreed Mark Gertler, an economist at New York University. Policymakers around the world are committed to fighting inflation and will not allow it to get out of hand. “Central banks can always make inflation transient by raising interest rates sufficiently.”
Eshe nelson and Ben dooley contributed reports.