Last week, the European statistics agency, Eurostat, released a revised estimate of the eurozone inflation rate for February. It was not a happy report: Consumer prices were up 5.9% from a year earlier, more than most analysts had expected. And it will get worse, as the effects of the war in Ukraine weigh on food and energy prices.
The UK has yet to release its February inflation figure, but the Bank of England expects it to match the index in the euro zone.
Of course, US inflation is even higher, with consumer prices in February up 7.9% year-on-year. These numbers are not exactly comparable, for technical reasons, but inflation in the US appears to be around 2 percentage points higher than in Europe. I will come back to this difference and what could explain it. But certainly the fact that inflation has soared in a number of countries, not just the US, is noteworthy.
After all, the entire GOP and a large number of Conservative Democrats insist that the recent rise in US inflation was caused by President Biden’s big-spending policies.
Europe, however, had nothing comparable to Biden’s American Rescue Plan; last year, the eurozone’s structural budget deficit, a standard measure of fiscal stimulus, was only a third of that of the US as a percentage of GDP.
So why is inflation rising in Europe?
Part of the answer is rising energy prices. Last week I commented that Kevin McCarthy, the Republican House Minority Leader, declared that gas prices “are not Putin’s gas prices. They are President Biden’s gas prices.” Let me explain the absurdity of this claim, using British data.
At the end of December 2020, gasoline in Britain cost the equivalent of US$5.94 per gallon. By mid-March, it had risen to $8.23 a gallon. In the same period, gasoline prices in the US rose from US$ 2.24 (R$ 11.1) to US$ 4.32 (R$ 21.4). Taking into account Britain’s high taxes on gasoline, the price increases were similar, although Joe Biden is not, as far as I know, the British prime minister.
But it’s not just energy prices. Inflation in the US was pushed up in part by pervasive supply chain problems, with a big shift in demand for products putting pressure on ports, shipping capacity, etc.; these same pressures, which lasted much longer than many expected, also afflicted Europe.
So what does high inflation in Europe tell us? First, that a large part—perhaps two-thirds—of the acceleration in US inflation reflects global forces rather than country-specific policies and developments. Second, as these global forces could diminish if we finally get out of this dark tunnel of pandemic and war, US inflation could even decrease substantially, even without drastic policy changes. (See how I avoided using the word “transient”? Oh, wait.)
That said, inflation is hot on this side of the Atlantic. Because? One important factor, almost certainly, is that the US economy has recovered faster than Europe’s. In the fourth quarter of 2021, real GDP (Gross Domestic Product) in the US was 3% higher than it had been before the pandemic, while the eurozone had barely recouped its losses. And, in case you’re wondering, you don’t have to discount those numbers for the fastest population growth in the US; our working age population has actually stagnated since 2019, largely thanks to a collapse in immigration.
And US economic growth has helped workers, as has GDP. While real hourly wages have been eroded by inflation, total pay for work has increased by 13.6% since the eve of the pandemic, compared with just 5.2% in Europe.
Today, excess inflation suggests that recent US economic growth was a good thing in excess. Our economy clearly looks overheated, which is why the Fed is right to have started raising interest rates and should continue to do so until inflation subsides.
While overheating is a problem, though, we shouldn’t let it overshadow the good things that have happened. We recovered quickly from the pandemic recession and appear to have avoided the long-term “scar” effects that many feared. Most, but not all, of the inflation we are experiencing likely reflects temporary global forces, and several indicators — consumer surveys, professional forecasts and financial markets — suggest that longer-term inflation expectations remain “anchored”, that is, , inflation is not embedded in the economy.
There’s still the question of why Americans feel so bad about the economy, or at least tell pollsters they feel bad (they’re spending like they’re optimistic). We are not alone in this regard: European consumer sentiment has also been punched in the face by inflation, although nothing comparable to what we have seen here. But this is a topic to which I will return another day.
For now, I would just tell Americans to look at their economy in the European mirror. Recovery from the pandemic was always going to be tough, and Vladimir Putin made it tougher. But under the circumstances, we’re actually doing relatively well.
Translated by Luiz Roberto M. Gonçalves
