Rapid global inflation may fade quickly
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.
The U.S. Federal Reserve’s preferred price index rose 4.2 percent in July from the prior year, more than double the central bank’s 2 percent 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 dialing 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 $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.
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.