Rapid global inflation may fade soon
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 policy makers 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 policy makers 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 US Federal Reserve’s preferred price index rose 4.2% in July from the prior year, more than double the central bank’s 2% 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.
It’s not just higher prices that advanced economies have in common.
Complaints about labor 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 labor 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.
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 hotdogs, but inflation counts into interest rates, so its downward trend in the 21st century has left less room for policy makers 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,” Mr. 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 policy makers 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,” Mr. 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% or 3% — 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. — ©