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How the world’s major economies deal with the specter of inflation | Global economy

The world’s major central banks are scratching their heads over how to deal with the rising cost of living. A hike in interest rates could deal a blow to the post-pandemic recovery. If you wait too long, inflation can get out of hand.

United States

If there is one word that keeps Federal Reserve Chairman Jerome Powell up at night, it is “temporary.”

The US economy has recovered from the pandemic recession through many measures. Unemployment fell to 4.6% in October, after hitting a staggering 14.8% high at the height of the pandemic. The job market is so hot that record numbers of people are quitting to find new jobs and wages are rising. The stock markets continue to hit record highs. People are spending again.

And yet the specter of inflation hangs over everything. Rising energy costs, rising consumption and supply shortages have pushed US inflation to an annual rate of 6.2%, a level not reached in more than 30 years. Powell and the Biden administration have repeatedly said these spikes are temporary and will decline as the pandemic’s economic impact wears off. However, prices have continued to rise.

The fear raised by the Republicans’ political expediency, and no doubt astronomical inflation, in inflation media coverage has worried US consumers. US consumer confidence hit a 10-year low in November.

The Fed’s main tool to contain inflation is to raise interest rates. It’s a blunt instrument that Powell was careful with. The dilemma is clear: a rate hike too quickly could stall a confusing recovery and prove counterproductive when the price hikes are actually temporary. If inflation is not dampened, however, it could, in the worst case scenario, lead to rapid price hikes, further interest rate hikes and a recession.

United Kingdom

The Bank of England is expected to become the first major central bank to hike rates when officials meet next month.

Many City analysts believe that inflation jump to 4.2% in October – its highest level in a decade – will force policymakers to hike the key rate from 0.1% to 0.25% before going again in February is increased to 0.5%.

As one of the more open economies in the world, where more than a third of its GDP depends on trade, the UK has suffered more than most from the supply chain crisis and soaring energy prices.

Meanwhile, Brexit has restricted access to skilled workers who may once have filled a record number of vacancies.

Now politicians fear that workers, encouraged to fill vacancies by the lack of people, will demand higher wages to offset the higher cost of living. This could trigger a harmful wage-price spiral for several years.

Central bank critics ask what higher borrowing costs will do to calm world market-driven energy prices. There is also little evidence that labor shortages can be solved by making access to credit more expensive, it said.

Instead, a rise in interest rates could further undermine the living standards of those who rely on credit for survival.

Inflation by country

European Union

Since traders are betting on a rate hike from the Bank of England and the US Federal Reserve, the European Central Bank (ECB) has sent a clear message: Don’t expect Frankfurt to be the same.

Inflation in the euro zone is now 4.1%, a 13-year high, although price increases have fluctuated sharply within the zone.

The ECB sets the interest rates for all 19 members of the euro currency union. Her boss, Christine Lagarde, warned on Friday that pressing the button too early could affect recovery from the pandemic.

“At a time when spending power is already being squeezed by higher energy and fuel bills,” she said, “over-tightening would be an unjustified headwind to recovery.”

Oliver Rakau, German chief economist at Oxford Economics, agrees with the ECB that inflation in the euro zone is temporary. His team predicts that inflation will slow to 2% in 2022, from an average of 2.4% this year.

He recommends easing the quantitative easing plan (the asset purchase program) and its pandemic sibling before increasing the cost of borrowing.

“Suddenly talking about rate hikes before you’ve normalized your QE buying doesn’t make a lot of sense in my opinion,” he said.

Bottleneck table by country

France

While French interest rates are set by the ECB in Strasbourg, the rate of inflation is unique to each euro area country and governments have some discretion in how to deal with rising prices.

The annual inflation rate in October was 2.6%, the highest since 2008, driven by a 20% increase in energy prices.

Prime Minister Jean Castex responded by announcing an “inflation adjustment” of € 100 (£ 84) to be paid to anyone making less than € 2,000 a month, an estimated 38 million people.

The ministers also intervened on energy prices. Gas tariffs will be frozen until next April and electricity will be limited to a 4% increase.

The Bank of France’s latest forecast is that inflation is “temporary but could last a few more quarters”. Its governor, François Villeroy de Galhau, said he saw no reason for the ECB to raise rates next year.

Australia

The Reserve Bank of Australia, the country’s central bank, appears to be relying on “Australian exceptionalism” not to raise its official cash rate from a record low of 0.1% before 2024.

As Gareth Aird, chief executive officer of Australia’s largest bank, the Commonwealth, recently said in a briefing note, “The RBA has sounded as cautious as it believes it can on the inflation outlook at every opportunity it presents itself is”.

Like elsewhere, inflation is on the rise. Australia’s core consumer prices rose 0.7 percentage points to 2.1% in the September quarter. It was the first time in six years that the measure of inflation had risen into the target range of 2% to 3% since the 1990s.

The central bank, suspicious of past criticism, has insisted that it wants wages to rise, ideally faster than inflation. Therefore, be “patient” with rising prices before “considering a rate hike next year,” said RBA Governor Philip Lowe this week.

Japan

Japan is a notable exception to the surge in inflation. As a pioneer of ultra-loose monetary policy – the interest rate has been minus 0.1% since 2016 – the world’s third largest economy is struggling to end decades of deflation and stagnation and will probably never reach its inflation target of 2% anytime soon.

Although government data for October showed a slight year-over-year increase in core consumer prices, largely driven by higher fuel prices, economists cautioned that underlying inflation was likely to be modest.

“When looking at artificial biases and one-off hits, we still expect underlying inflation to accelerate to just under +1.0% early next year before falling back,” said Tom Learmouth, a Japanese economist with Capital Economics.

In a recent Reuters poll, economists said they expected 13 out of 25 central banks to raise rates at least once by the end of next year. The Bank of Japan was not one of them. “The BoJ lives in a completely different world as an outlier from the global trend,” said Masamichi Adachi, chief economist at UBS Securities, recently.

Japan’s rise as the only Keynesian in the room was underscored when the country’s new prime minister, Fumio Kishida, came on 19. The spending package includes spending cash for those under the age of 18 and investing in pandemic preparedness.

China

Some drivers of inflation and global supply chain problems can be directly traced back to China. It is the world’s largest exporter and accounts for almost 30% of global production: disruptions in China in the form of a lack of electricity, labor and ships have global repercussions.

The country’s annual inflation rate rose to 1.5% in October, up from 0.7% in September, its highest level in 13 months. This was driven by food and fuel costs. More worryingly, factory gate prices rose 13.5%, the fastest rate in 26 years, largely due to energy costs.

But the People’s Bank of China has more pressing problems to deal with – including a volatile real estate sector. The key rate has been at 3.85% since the beginning of 2020 and, given the damaging effects on the housing market, it is unlikely to rise.

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