Price increases are skyrocketing in many advanced economies as consumer demand, shortages and other pandemic-related factors combine to cause a burst of inflation.
The spike has become a source of annoyance to consumers and concern to policymakers who fear rapid price increases will continue. It’s one of the key factors central bankers look at when deciding when — and how quickly — monetary policy will return to normal.
Most policymakers believe that the current rapid inflation will slow down. That expectation may be bolstered by the fact that many economies are experiencing a price hike at the same time, even though they used vastly different policies to cushion the blow of pandemic lockdowns.
The shared inflation experience underlines that the mismatch between what consumers want to buy and what companies can deliver is driving price increases. While these can be enhanced by global stimulus spending, they are not the simple result of country-specific policy choices – and they should eventually work on their own.
“There’s a lot of stimulus in the system, and it’s driving up demand, leading to higher inflation,” said Kristin Forbes, an economist at the Massachusetts Institute of Technology and former outside member of the Bank of England’s Monetary Policy Committee.
“Some of these big global movements tend to be ongoing and temporary,” said Ms. Forbes. “The big question is, how long will this pressure in the supply chain last?”
The US Federal Reserve’s preferred price index rose 4.2 percent in July from the previous year, more than double the central bank’s target of 2 percent, which it aims to meet over time, on average. In the eurozone, inflation has recently accelerated to its highest level in about a decade. In the United Kingdom, Canada, New Zealand, South Korea and Australia, price increases have exceeded the central bank targets.
The big increases have come as supply chains around the world have been snapped, raising transportation costs and twisting the delicate balance of corporate globalization. Prices for airline tickets and hotel rooms plunged into the depths of the pandemic last year, and now they are bouncing back to normal levels, leaving the numbers looking higher than they would be compared to a less depressed base. Neither problem should last indefinitely.
There is a danger that the global price hike could last longer – and become more country-specific – if workers in high-inflation countries today negotiate wage increases and accept increasingly higher prices. Bringing back entrenched inflation under control could require painful monetary policy responses, likely to plunge national economies back into recession.
Given that high stakes, the mere possibility of continued inflation is increasing pressure on central banks around the world to consider rolling back their still substantial monetary policy support – even though many have not fully recovered and the pandemic is not over.
Economies around the world are growing rapidly this year, in part due to massive government spending that has pumped some $8.7 trillion into the advanced Group of 20 markets since January 2020, and central bank policies that make money very cheap. to borrow and spend. Central banks have been buying bonds to keep long-term interest rates low and short-term borrowing costs close to or even below zero.
The advanced economies do not only have higher prices in common. Complaints about labor shortages in some fields are also bubbling around the world. The number of vacancies in the European construction, leisure and hospitality and information technology sectors has increased. In Britain, companies are widely complaining about labor shortages, and a lack of truck drivers, caused in part by the country’s departure from the European Union, has disrupted supply chains and caused shortages of milkshakes at McDonald’s and peri-peri chicken at Nando’s. , a restaurant chain known for its dish.
Those widespread trends highlight the idiosyncrasies of the current economic moment. Trade came to a sudden standstill, then abruptly resumed as government aid payments filled consumers’ wallets, leaving people eager to spend even as manufacturers struggled to return to full production and restaurants scrambled to get staff back.
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Still, some central bankers are becoming nervous about their policies in countries where inflation is higher and labor supply problems are starting to push up wages. They worry that a cocktail of low interest rates and large purchases of government bonds will fuel the fires of temporary inflation, keeping asset and consumer prices higher. Prominent commentators, both in the media and financial centers from the City of London to Wall Street, have joined the chorus by arguing that central bankers are “behind the curve.”
In Britain, Michael Saunders, a policymaker, has already voted to end the central bank’s buying program, predicting that some of the inflation spike would not be temporary. A few European central bankers have indicated that they should debate slowing down their pandemic-era stimulus buying program, and at least one has even suggested an immediate slowdown. Some US officials, including the president of the Federal Reserve Bank of St. Louis, James Bullard, have said that current inflation may not go away completely and policies need to be ready to respond.
The extreme concerns are in the minority. Most policymakers in advanced economies are betting that price increases are temporary and that inflation may even fall back to uncomfortably low levels in the longer term. From Ottawa to Frankfurt they have warned against overreacting.
“While underlying global disinflationary factors are likely to evolve over time, there is little reason to think they have suddenly reversed or declined,” Fed chairman Jerome H. Powell said in 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 and halt an economically damaging downward spiral that was beginning to develop.
Slow price increases may sound like good news to those buying gas, baguettes or hot dogs, but inflation counts in interest rates, so the 21st century’s downward trend has left policymakers less room to cut rates to save the economy over time. of problems. This has contributed to a weakening of the recovery, a further decline in inflation and fueling a cycle of stagnation.
Even during the reopening, Japan – a notable outlier among advanced economies – remains waging a protracted war and battling outright price falls. Outbreaks of the coronavirus are keeping shoppers at home, pushing prices on both Uniqlo clothing and snacks. Persistent forces such as population aging have also put an end to demand and limited companies’ ability to charge more.
Other economies are expected to return to their trends of slow growth and weak inflation as the pandemic shock wears off and aging becomes a more dominant factor, said Jay Bryson, chief economist at Wells Fargo.
“It’s like taking a step up,” Mr. Bryson said. “Once you get to the next step, the gradient decreases. It is a one-time adjustment of the price level due to the pandemic.”
If inflation does indeed fade, as policymakers expect, the current eruption could even bring benefits: In the United States, it has helped push inflation expectations back out of the dangerously low zone to levels historically consistent with healthy price increases. It has proven more difficult for central bankers to raise prices than for them to cool them, so opportunistic inflation could help the Fed meet its price targets over the longer term.
But if it takes too long to go away, the consequences can be more serious.
“If I’m wrong and inflation gets out of hand, it would slow economic growth in the longer term,” said Mr Bryson, explaining that high inflation tends to fluctuate, making it difficult for companies to plan and invest.
But he said even if the higher prices continued, they could settle at 2.5 percent or 3 percent — which wouldn’t cause 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’re talking 1970s-style inflation,” said Mark Gertler, an economist at New York University. Policy makers around the world are committed to fighting inflation and will not allow it to spiral out of control. “Central banks can always make inflation temporary by raising interest rates enough.”
Eshe Nelson and Ben Dooley reporting contributed.