Inflation’s Worldwide Surge May Be a Good Sign

Share price gains skyrocket in many advanced economies as consumer demand, shortages and other pandemic-related factors combine to fuel a surge in inflation.

The surge has become a source of annoyance among consumers and concern among policy makers, who are concerned that rapid price hikes could last. This is one of the main factors central banks look to when deciding when – and how quickly – monetary policy will return to normal.

Most policymakers believe that today’s rapid inflation will ease. That expectation could be heightened by the fact that many economies are seeing prices rise at the same time despite taking very different measures to cushion the blow of the pandemic lockdowns.

The shared inflationary experience underscores that discrepancies between what consumers want to buy and what businesses can deliver help fuel price increases. Although these can be increased by global economic spending, they are not the simple result of country-specific political decisions – and should ultimately work out by themselves.

“There are a lot of stimuli in the system and it drives demand and that drives inflation,” said Kristin Forbes, an economist at the Massachusetts Institute of Technology and a former external member of the Bank of England’s monetary policy committee.

“Some of these major global movements tend to be and turn out to be temporary,” said Ms. Forbes. “The big question is: how long will this pressure last in the supply chain?”

The Fed’s preferential price index rose 4.2 percent year-over-year in July, more than double the central bank’s target of 2 percent on average over time. 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 gains have risen well above the level set as the target by the central banks.

The big increases came when supply chains around the world became jumbled, increasing transportation costs and upset the delicate balance of corporate globalization. Airline tickets and hotel room prices fell into the depths of the pandemic last year and are now recovering to normal levels, making the numbers seem higher than when compared to a less depressed base. None of the problems should last indefinitely.

There is a risk that global price hikes will last longer – and become more country specific – if workers in high-inflation countries negotiate wage increases today and accept steadily higher prices. Bringing stuck inflation back under control may require painful monetary policy responses that are likely to plunge economies back into recession.

Given these high stakes, the very possibility of sustained inflation is adding to the pressure on central banks around the world to consider withdrawing their still substantial monetary support – even if many have not fully recovered and the pandemic has not yet ended.

Economies around the world are growing rapidly this year, in part due to the huge government spending that has pumped around $ 8.7 trillion into the Group of 20 advanced markets since January 2020, and central bank policies that make it very cheap made borrowing and spending money. Central banks have bought bonds to keep longer-term interest rates low and to keep short-term borrowing costs near or even below zero.

It is not just higher prices that the advanced economies have in common. Complaints about labor shortages in some areas are also simmering around the world. The number of vacancies has increased in European construction, leisure, hospitality and information technology. In the UK, businesses are widely complaining about labor shortages, and a shortage of truck drivers, partly caused by the country’s exit from the European Union, has disrupted supply chains and the shortage of milkshakes at McDonald’s and peri-peri chicken at Nando’s , a famous restaurant chain, stoked the plate.

These widespread trends illustrate the oddities of the current economic moment. Trade suddenly stalled and then resumed abruptly as government bailouts filled consumers’ wallets and made people want to spend, even when manufacturers struggled to get back to full production and restaurants scrambled to re-staff Find.

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9/7/2021, 5:26 p.m. ET

Still, some central bankers are getting nervous about their policies in countries where inflation is higher and labor supply problems are starting to drive wages higher. They fear that a cocktail of low interest rates and large government bond purchases will fuel the temporary inflationary fire and help keep asset and consumer prices 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 the UK, Michael Saunders, a policy maker, has already voted to end the central bank’s bond-buying program, predicting that some of the spike in inflation would not be temporary. Some European central bankers have hinted they should discuss slowing their pandemic-era stimulus package, 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 may not completely subside and that policy should be ready to respond.

The extreme concerns are in the minority. Most policymakers in advanced economies are betting that price increases will be temporary and that inflation may even decline to uncomfortably low levels in the longer term. From Ottawa to Frankfurt they have warned against overreaction.

“While the underlying global disinflation factors are likely to evolve over time, there is little reason to believe that they have suddenly reversed or weakened,” said Jerome H. Powell, chairman of the Fed, in a recent speech. “It is more likely that they will continue to weigh on inflation once the pandemic goes down in history.”

Prior to the pandemic, advanced economies had spent years driving inflation to halt an economically damaging downward spiral that had begun to take hold.

Slow price increases may sound like good news to people buying gasoline, baguettes, or hot dogs, but inflation is one of the interest rates, so its downward trend is in the 21st. This has helped weaken the recovery, lower inflation even further and fuel a cycle of stagnation.

Even during the reopening, Japan – a notable outlier among advanced economies – continues to fight this long-term war, struggling with total price declines. Coronavirus outbreaks have kept shoppers at home and weighed down prices on Uniqlo clothing and snacks alike. Persistent forces such as the aging population have also dampened demand and limited the ability of businesses to ask for more.

Other economies are expected to return to their slow growth and weak inflation trends as the pandemic shock subsides and aging populations become a dominant force, said Jay Bryson, chief economist at Wells Fargo.

“It’s like going up a step,” said Mr. Bryson. “When you get to the next step, the rate of increase will decrease. It is a one-time price level adjustment because of the pandemic. “

If inflation subsides, as policymakers anticipate, the current outbreak could indeed offer benefits: In the United States, it has helped bring inflation expectations back out of dangerously low levels to levels that are historically consistent with healthy price gains . It has proven to be more difficult for central bankers to raise prices than to cool them down, so opportunistic inflation could help the Fed meet its longer-term price targets.

However, if it takes too long to go away, the consequences could be more severe.

“If I’m wrong and inflation got out of hand, it would result in slower economic growth in the long run,” Bryson said, explaining that high inflation tends to fluctuate widely, making it difficult for companies to plan and invest.

But he said even if the higher prices persisted, they could settle at 2.5 or 3 percent – which wouldn’t cause any significant problems. In contrast, inflation in the United States soared to double digits 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. Policy makers around the world are committed to fighting inflation and will not let it get out of hand. “Central banks can always make inflation temporary by raising interest rates enough.”

Eshe Nelson and Ben Dooley contributed to the coverage.

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