Rapidly Rising Prices and Politicians’ Failure to Control Them: A Global Analysis

Prices are growing too fast for many of the world’s major economies, and politicians are failing to control them, says a New York Times (NYT) analysis, cited by BGNES.

All over the world, from Melbourne to Miami, people are feeling the brunt of a big increase in the prices of essential goods.

The biggest jump in inflation in many advanced economies for many years underscored the global factors driving up prices, namely the disruption caused by the coronavirus pandemic.

The issue is topical for politicians in many countries facing similar challenges. In an effort to control inflation, central banks quickly raised interest rates to slow economies in the hope of lowering prices. Failure threatens a destabilizing period of steep price increases. Higher and less predictable inflation will put pressure on households and businesses, making it harder to plan for the future.

But if policymakers react too aggressively – all at once – there could be a painful slowdown in global economic growth. This, in turn, would increase the risk of a severe recession that would shut down businesses and put many people out of work. Given the potential costs, policymakers do not want to overreact and do more damage to their economies than is necessary to reduce inflation.

Many central banks approach the dilemma in a similar way and focus on dealing with persistently high inflation rates. Officials fear that without appropriate measures it could become entrenched, in which case the “shrinkage” process would prove to be even more painful.

In March 2022, the US Federal Reserve raised its key interest rate from near zero to just over 5% and will raise it twice more by the end of 2023. The European Central Bank, which sets the economic policy for the 20 countries that use the euro, also expects to further raise interest rates, which are already at record levels since 2001. The Bank of England recently surprised investors by raising interest rates for the 13th time to a higher than expected level.

In the US, inflation rose significantly in 2021, but fell faster than in many European countries. This is partly due to the fact that the latter are more exposed to the consequences of the Russian-Ukrainian conflict, which has led to higher food and energy prices.

However, without these variable prices, core inflation in many countries appears to be sustainable. This points to a common problem facing policymakers: non-dynamic service prices are rising much faster than before the pandemic.

The prices of labor-intensive services, such as health care and education, tend to depend on wage growth and the economy as a whole. In short, this is the kind of price increase that central banks can fight by raising interest rates to slow borrowing, curb spending and ultimately cool the economy.

At the recent meeting of central bank governors, Fed Chairman Jerome Powell said little progress had been made on inflation in the services sector, including hotels, restaurants and banks.

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2023-07-07 19:00:00
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