Rising inflation proved to be a much more persistent and pervasive process than the major central banks anticipated. In 15 of the 34 countries classified as advanced economies by the IMF’s World Economic Outlook, inflation in the 12 months to December 2021 was above 5%, an episode not seen in more than 20 years. In 78 of the 109 emerging countries, annual inflation is also above 5%. This share is about twice as high as at the end of 2020.
One could say that the phenomenon is global – or almost so, as China and Japan are immune so far. Certainly, there are several common factors among the most diverse countries, such as the increase in commodity prices. In January 2022, oil prices were 77% higher than in December 2020, while agricultural commodity prices rose 35% over the same period. Whether because of disruptions in global chains affected by the pandemic, extremely stimulating monetary and fiscal policies or the accelerated search for clean energy, the fact is that all possible reasons for the rise in commodities are taking longer than expected.
The big problem with the concept of globalized inflation is that it is associated with exogenous shocks, generally seen as transient, which makes a precise diagnosis difficult and blurs the prescription of how central banks should act. Not a few central banks used the justification of inflation being global to delay the withdrawal of monetary stimulus. However, understanding the idiosyncrasies of the inflationary process in each country is essential to effectively lower inflation.
In emerging markets, the exchange rate depreciation contributed significantly to the inflationary process. In these countries, inflation expectations are less anchored and more in tune with exchange rate movements, not to mention their history of high inflation and weak fiscal anchors, which results in greater inflationary inertia. For no other reason, some emerging countries understood that the phenomenon was not entirely global or transitory and began to tighten their monetary policies considerably last year. However, the weakening of the fiscal anchor reduces the strength of monetary policy and the disinflation process slows down.
While most emerging economies still have idle capacity in their economies, in the US, England and some Eurozone countries the diagnosis of overheating took a while to be recognized. In the US, in particular, different labor market indicators have been suggesting a warming scenario, with strong wage pressures, for some time. Theoretically, monetary policy would have to be tightened in order to generate a slowdown in economic activity capable of containing the transmission of supply shocks and rising wages to other prices.
However, today there are doubts about the willingness of the Fed (Federal Reserve) to “choke” the recovery, considering that it continues to add stimulus via bond purchases, even after abandoning the speech of transitory inflation. Another factor of mistrust is its dual mandate focused on unemployment and, more recently, on income distribution. Bringing inflation from more than 7% to something close to 2% without causing a recession is something never seen before in history. The Fed’s credibility is being questioned and could result in a slower process of falling inflation in the US.
The latest developments in Ukraine suggest a more complex scenario. A new round of increases in the prices of important commodities would, in the circumstances of a possible conflict, constitute a stagflationary shock. In this case, the greater the chances of additional fiscal stimulus (such as the reduction of energy taxes, already under discussion in several countries), of a fall in real wages and a deceleration of world growth – and greater will be the uncertainty regarding monetary policy. North-American.
If it was no longer easy to predict when inflation would return to pre-pandemic levels, the situation makes the task more complex in the short term. Both for emerging and developed countries, it would be better to face the current moment with less stimulating global interest rates, more adjusted fiscal policies, lower inflation and more credible central banks.
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