Inflation has surged across advanced economies. The shared experience underlines that price gains come from temporary drivers — for now.
Price gains are shooting higher across many advanced economies as consumer demand, shortages and other pandemic-related factors combine to fuel a burst of inflation.
The spike has become a source of annoyance among consumers and worry among policymakers who are concerned that rapid price gains might last. It is one of the main factors central bankers are looking at as they decide when — and how quickly — to return monetary policy to normal.
Most policymakers believe today’s rapid inflation will fade. That expectation may be reinforced by the fact that many economies are experiencing a price pop in tandem, even though they used vastly different policies to cushion the blow of pandemic lockdowns.
The shared inflation experience underscores that mismatches between what consumers want to buy and what companies are able to deliver are helping to drive the price increases. While those may be amplified by worldwide stimulus spending, they are not the simple result of nation-specific policy choices — and they should eventually work themselves out.
“There is a lot of stimulus in the system, and it is pushing up demand, and that’s driving higher inflation,” said Kristin Forbes, a Massachusetts Institute of Technology economist and former external member of the Bank of England’s Monetary Policy Committee.
“Some of these big global moves do tend to pass through and prove temporary,” Forbes said. “The big question is: How long will these supply chain pressures last?”
The US Federal Reserve’s preferred price index rose 4.2 per cent in July from the prior year, more than double the central bank’s 2 per cent target, which it seeks to hit on average over time. In the eurozone, inflation recently accelerated to the highest level in about a decade. In the United Kingdom, Canada, New Zealand, South Korea and Australia, price gains have jumped well above the level central banks set as their goals.
The big increases have come as supply chains have snarled around the world, adding to transportation costs and throwing the delicate balance of corporate globalization badly out of whack. Prices for airline tickets and hotel rooms dipped last year in the depths of the pandemic, and now they are bouncing back to normal levels, making the numbers look higher than they would if compared with a less depressed base. Neither issue should last indefinitely.
There is a danger that the global price surge could last longer — and become more country-specific — if workers in nations experiencing high inflation today bargain for wage increases and are more accepting of steadily higher prices. Bringing entrenched inflation back under control could require painful monetary policy responses, ones that would probably plunge national economies back into recession.
Given those high stakes, the mere possibility of lasting inflation is ramping up pressure on central banks around the world to consider dialling back their still-substantial monetary policy support — despite the fact that many are not yet fully recovered and the pandemic has not ended.
Economies around the world are growing quickly this year, partly as a result of enormous government spending that has pumped some US$8.7 trillion into the advanced Group of 20 markets since January 2020 and central bank policies that have made money very cheap to borrow and spend. Central banks have been buying bonds to hold down longer-term interest rates and keeping short-term borrowing costs near or even below zero.
It’s not just higher prices that advanced economies have in common. Complaints about labour shortages in some fields are also bubbling up around the world. Job vacancy rates have been climbing in Europe’s construction, leisure and hospitality, and information technology sectors. In the United Kingdom, firms widely complain of labour shortages, and a dearth of truck drivers caused partly by Britain’s exit from the European Union has disrupted supply chains and fueled shortages of milkshakes at McDonald’s and peri peri chicken at Nando’s, a restaurant chain famous for the dish.
Those widespread trends highlight the oddities of the current economic moment. Commerce came to a sudden stop and then abruptly restarted at a time when government relief payments had padded consumers’ wallets, making people eager to spend even as manufacturers struggled to get back to full production and restaurants scrambled to staff back up.
Still, some central bankers are growing nervous about their policies in countries where inflation is higher and labour supply issues are beginning to push up wages. They fret that a cocktail of low interest rates and big government bond buying will add fuel to the temporary-inflation fire, helping asset prices and consumer prices to remain higher. Prominent commentators, both in the media and in financial centers from the City of London to Wall Street, have added to the chorus arguing that central bankers are “behind the curve.”
In Britain, Michael Saunders, a policymaker, already voted to end the central bank’s bond-buying program, predicting that some of the inflation spike would not be temporary. A few European central bankers have indicated that they should start debating slowing down their pandemic-era stimulus purchase 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 today’s inflation might not fully fade and that policy ought to be poised to react.
The extreme worriers are in the minority. Most policymakers in advanced economies are betting that price increases will be temporary and that inflation might even fade back to uncomfortably low levels over the longer term. From Ottawa, Ontario, to Frankfurt, Germany, they have warned against overreacting.
“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Fed Chair Jerome Powell said during a recent speech. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”
Before the pandemic, advanced economies had spent years trying to coax inflation higher, trying to stop an economically damaging downward spiral that had begun to take hold.
Slow price gains may sound like good news to people buying gas, baguettes or hot dogs, but inflation counts into interest rates, so its downward trend in the 21st century has left less room for policymakers to cut rates to rescue the economy during times of trouble. That has helped to weaken recoveries, dragging inflation even lower and fueling a cycle of stagnation.
Even amid the reopening, Japan — a notable outlier among advanced economies — continues to fight that long-run war, battling outright price declines. Coronavirus outbreaks have kept shoppers there at home, weighing on prices for Uniqlo attire and for snacks alike. Persistent forces like population aging have also put a lid on demand and constrained companies’ ability to charge more.
Other economies are expected to return to their trends of slow growth and weak inflation as the pandemic shock fades and population aging becomes a more dominant force, said Jay Bryson, chief economist at Wells Fargo.
“It’s like going up a step,” Bryson said. “Once you get to the next step, the rate of increase drops off. It’s a one-time price level adjustment because of the pandemic.”
If inflation does fade as policymakers expect, the current burst could actually offer benefits: In the United States, it has helped to nudge inflation expectations back out of the dangerously low zone, to levels that are historically consistent with healthy price gains. It has proved harder for central bankers to move prices up than it is for them to cool them off, so that opportunistic inflation could help the Fed to nail its price goals in the longer run.
But if it takes too long to go away, the consequences could be more serious.
“If I’m wrong and inflation does get out of hand, that would lead to slower economic growth in a longer-run sense,” Bryson said, explaining that high inflation tends to bounce around a lot, making it tough for companies to plan and invest.
But he said that even if higher prices last, they might settle in at 2.5 per cent or 3 per cent — which would not cause meaningful problems. By contrast, inflation in the United States popped to double-digit levels during the Great Inflation of the 1970s.
“I don’t think we’re talking about 1970s-style inflation,” agreed Mark Gertler, an economist at New York University. Policymakers around the world have committed to fighting inflation and will not allow it to run out of control. “Central banks can always make inflation transitory by raising interest rates enough.”
This article originally appeared in The New York Times.
Written by: Jeanna Smialek
Photographs by: Brittainy Newman and Andrew Testa
© 2021 THE NEW YORK TIMES
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