From Melbourne to Manchester to Miami, people are struggling under the weight of massive increases in the prices of what they buy every day.
Inflation spikes, the worst in many advanced economies in decades, highlight the turmoil caused by the global price-boosting factor: the coronavirus pandemic.
The risks are high for policy makers around the world facing similar problems. In an attempt to control inflation, central bankers are raising interest rates rapidly to slow the economy in the hopes of cooling prices.
Uncontrolled inflation could lead to periods of instability when prices skyrocket. Rising and unpredictable inflation puts pressure on homes and businesses, making it difficult to plan for the future.
But an overly aggressive reaction by economic policy makers, and all at once, could tragically undermine global growth. That could increase the risk of a major recession, with businesses closing and people out of work. Given the potential costs, policymakers don’t want to push the economy harder than necessary to keep inflation in check.
Many central banks are grappling with these trade-offs as well, with a focus on fighting stubborn high inflation. Officials worry that if inflation is left unchecked for too long, it could become entrenched and more difficult to eliminate.
Leaders of major central banks in North America, Europe and beyond have recently said inflation is slowing but well above their usual rate targets, which are often around 2%, and will continue to raise interest rates. Stated.
Federal Reserve officials expect the rate to rise from near zero to just over 5% in March 2022, and two more hikes to just over 5.5% in 2023. Policymakers at the European Central Bank, which sets policy for the 20 countries that use the euro, also expect interest rate hikes to continue, reaching their highest level since 2001. The Bank of England recently surprised investors by raising its policy rate more than expected. 13 consecutive increases.
Inflation rose significantly in the United States in 2021, but declined more rapidly than in many parts of Europe. One reason for this is that Europe has been greatly exposed to the effects of Russia’s invasion of Ukraine, causing food and energy prices to skyrocket.
But aside from these price volatility, so-called core inflation looks stubborn in many countries. This highlights a common problem facing policy makers. That means service prices, which have been slow to move, are rising much faster than before the pandemic.
Prices for labour-intensive services such as health care and education tend to follow wage growth and the strength of the economy as a whole. In short, these are the kinds of price rises that central banks can somehow respond to by borrowing less, spending less, and ultimately by raising interest rates to cool the economy.
At a recent meeting of central bankers, Fed Chairman Jerome H. Powell said he “still hasn’t seen much progress” on inflation in services sectors such as hotels, restaurants and banks.
Chart Source: FactSet (Policy Rates). Organization for Economic Co-operation and Development (inflation rate).
This map includes OECD member countries and selected major economies. The line chart shows the year-on-year change in the latest OECD central bank policy target rate and consumer price index as of May. For Australia, the change in consumer prices is for the first quarter of the year.
Eshe Nelson contributed to the report.
