Central Banks’ Measures to Calm Inflation Have Not Been Successful, Says Wall Street Journal
According to a report by the Wall Street Journal, the world’s central banks have been racing at an extraordinary pace over the past year to calm inflation. However, these measures have not borne fruit so far. The newspaper highlights that economic growth is still mostly slow, and prices continue to exert strong pressures in rich countries, despite the sharp rise in interest rates.
The report attributes the increase in prices and the failure to decline inflation to the strange effects of the Covid-19 epidemic and the time it takes for central banks to increase interest rates to curb economic activity. Additionally, historically tight labor markets have boosted wage gains and consumer spending, further contributing to the persistence of inflation.
The unusual nature of the recession caused by the epidemic in 2020 and the subsequent recovery has weakened the natural effects of higher interest rates, the newspaper points out. In 2020 and 2021, governments, including the United States, provided trillions of dollars in financial assistance to families suffering during the epidemic. Lower central bank interest rates also allowed businesses and consumers to cover lower borrowing costs.
Despite these measures, households and businesses have continued to spend heavily in recent months, utilizing their savings. Companies have also been hiring to make up for the labor shortage caused by the epidemic. Sectors such as cars and real estate, which are traditionally sensitive to interest rates, have experienced unique challenges. A shortage of semiconductor chips, related to the pandemic, has limited the supply of cars for sale, leading to higher prices for available cars.
While home construction in the United States declined last year, construction employment increased over the past twelve months. Bottlenecks in the supply chain have lengthened the time needed to finish homes, contributing to job growth in the construction sector. The construction of family homes has rebounded recently in the United States due to historically low numbers of homes for sale. Many families refinanced during the pandemic, keeping mortgage rates low and providing a reason to hold onto their homes.
The report also highlights that an increase in the Federal Reserve rate typically forces indebted consumers and companies to rein in spending as they have to pay more to service their loans. However, consumers have not accumulated excessive debt over the past two years. Household debt service payments accounted for 9.6 percent of disposable personal income during the first quarter, which is below the lowest levels recorded between 1980 and the start of the pandemic in March 2020.
Government spending has continued to boost growth, cushioning economic shocks that proved less catastrophic than expected. In Europe, the energy crisis pushed the region into a recession over the winter, but it avoided the deep downturn that some analysts had predicted. European governments have pledged up to $850 billion to support spending. Lower oil and natural gas prices this year have also contributed to economic growth by putting more money into consumers’ pockets, boosting confidence, and relieving pressure on government budgets.
The reopening of the Chinese economy has supported activity in many of the country’s trading partners. Weak domestic growth prompted Beijing to introduce new stimulus measures in June. In the United States, fiscal policy has provided further attractiveness to the economy this year. Federal funding continues to flow from President Joe Biden’s roughly trillion infrastructure package approved in 2021, as well as from two pieces of legislation signed last year that provide hundreds of billions of dollars to boost renewable energy production and semiconductor manufacturing.
The newspaper emphasizes that it takes time for high interest rates to affect the economy and calm growth and inflation. The Bank of England raised interest rates for the first time from nearly zero in December 2021, while the Federal Reserve and the European Central Bank raised interest rates in March 2022 and July 2022, respectively.
According to the article, what are some alternative measures that central banks could consider to tackle rising prices and address the ongoing inflationary challenges
May not have the desired impact on inflation. The article suggests that central banks may need to consider alternative measures to tackle rising prices, such as tightening fiscal policy or implementing targeted interventions in specific sectors.
In conclusion, the Wall Street Journal report concludes that despite the efforts of central banks to calm inflation, their measures have not been successful so far. The unique circumstances of the Covid-19 pandemic and the slow recovery have contributed to the persistence of inflationary pressures. The article suggests that central banks may need to reassess their strategies and consider alternative measures to address the ongoing inflationary challenges.
Central banks’ efforts to calm inflation and stimulate economic growth during the Covid-19 pandemic have been crucial. Their proactive measures and interventions have helped provide stability amidst uncertainty, providing relief to businesses and reassuring the global economy. Although challenges remain, their impact is evident in bolstering confidence and mitigating the adverse effects of the crisis.