Even a global recession may not be able to crush inflation

But when you step back and think about it, the outlook for the global economy has actually dimmed in recent weeks. The economy is slowing, possibly slipping into a recession, as central banks raise interest rates to combat a once-in-a-generation price spike (see Figure 1).Evidence is scant, even with a month of data that beats US expectations Inflation has been nearly defeated (See Chart 2). In fact, it is spreading in many parts of the world.

For most of this year, the world feared a recession. In June, Google searches for “recession” approached a record high. But for a long time, pessimistic rhetoric was far ahead of reality. Median rich country output increased by about 1.3% from the end of 2021 to the third quarter of this year. Not spectacular growth, but not bad. The average unemployment rate for the year to September was OECDclubs in mostly wealthy countries, accounting for about 60% of the world gdp, fell by nearly one percentage point. The eurozone unemployment rate hit a record low. Consumer spending was strong, filling hotels, flights and restaurants around the world.

Now reality has caught up with the rhetoric. Rising borrowing costs are starting to have an impact. In many countries, including Canada and New Zealand, house prices are falling This is because homebuyers face increasingly expensive mortgages. Homebuilders are canceling construction projects and homeowners feel less wealthy. Other companies are also curbing spending. Researchers at the Bank of England say in their latest monetary policy report that more costly finance is “squeezing investment appetite”. A recent Federal Reserve Board meeting showed that business investment “is already beginning to respond to tightening financial conditions.”

Deteriorating economic conditions are starting to show up in ‘real time’ data. Goldman Sachs, a bank, publishes the Current Activity Index, a monthly measure of economic strength. Last month, for the first time since the first covid-19 lockdowns in 2020, the economies of rich countries appeared to contract (see Figure 3). Similarly, a global survey of purchasing managers sees a contraction for the first time since June 2020. gdp Growth at another bank, JPMorgan Chase, has halved.

Optimists point to a strong labor market. America’s formidable hiring machine has slowed, but it’s still booming, and in October he added more than 250,000 jobs. But signs of weakness are emerging elsewhere. Economist Claudia Sahm suggests a recession is approaching if the average unemployment rate over the past three months rises by at least half a percentage point above the lowest level in the previous year. Now, it turns out, her 8 out of 31 wealthy countries, including Denmark and the Netherlands, meet this criterion. This is not a high percentage compared to, say, 2007-2009, when the global financial crisis began. But it shows that a serious slowdown is now underway.

Start with width. When inflation started last year, it was limited to a few goods and services in most countries. It was a used car in America. It was food in Japan. In Europe it was energy. This gave experts a false sense of security, many of whom believed that once prices stopped rising on some of these factors, overall inflation would subside.

In fact, the inflation virus is spreading. We analyzed the consumer baskets of 36 mostly wealthy countries. Last year he had 60% of the central basket prices in June, up more than 4% over the previous year. Currently 67%. Even in Japan, a low-inflation country, the price of his third of baskets has risen by more than 4%. Part of this expansion has been attributed to a very strong dollar, which has led to higher inflation as imports have become more expensive. But it has to do with what is happening in the domestic economy.

This is where the second dimension, wages, comes into play. Wages provide guidance on the future path of inflation. When a company’s labor costs rise, they pass it on to their customers in the form of higher prices. Inflation optimists point to data from the US showing evidence of a slowdown in wages, despite an increase of more than 6% year-on-year. It seems not.

Elsewhere, however, there is less evidence of suppression. A new study by Pawel Adrjan of job site Indeed and his Reamonn Lydon of the Central Bank of Ireland found that nominal wages for jobs in the Eurozone have risen by more than 5% year-on-year and continue to accelerate. JP Morgan believes French wage inflation is “still a ways off”.in German igu Metal, a large union of metal and engineering workers, is calling for wage increases of up to 8%. Wage growth is still rising in New Zealand, Norway and Sweden. This is not to be expected at a time when the economic outlook is dire.

Similarly, there is no evidence that inflation is weakening in any survey-based measure of expectations. Compiled by the Cleveland Fed, Morning Consult, a data company, and Rafael Schoenle of Brandeis University, the figures measure inflation expectations among citizens in a variety of rich countries. According to the October survey, median countries generally expect prices to rise by 5% over the next year, similar to previous months (see Chart 5). Equally worrisome is the inflation expectations of businesses (the economic agents that actually set prices). A study by the Cleveland Fed based on research by his three economists, Bernardo Candia, Olivier Cobion and Yury Gorodnichenko, found that U.S. businesses now expect inflation to reach 7% next year, with this is the highest since his survey began in 2018.