Even a global recession may not be able to crush inflation

Meinvestors have I fainted at the good news. European stocks have risen since early October, with optimists proclaiming the end of the continent’s energy crisis. Chinese stocks soar Regulators eased restrictions on the real estate sector following recent talks of President Xi Jinping abandoning his “corona-free” policy. On November 10, following the news that US consumer price inflation was slightly below economists’ expectations, Nasdaq The index rose 7% as investors priced in lower interest rates.

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.

pay a high price

The “Sahm ​​Rule” reveals another important truth. That is, different countries move at different speeds. With the exception of the US, many places such as Australia and Spain are still growing decently. Sweden, where high interest rates are hitting high levels in the housing market, is losing momentum quickly. The UK is now almost certainly in recession. In Germany, soaring energy prices are forcing industry to close. It may be the worst situation in a wealthy country.

How deep will the recession get? Households in wealthy nations still have trillions of dollars of “excess savings” amassed by stimulus and other fiscal support over 2020-2021. This money allows them to continue spending in the face of declining real incomes. A larger private sector savings surplus means a recession is less severe, and a healthy savings pot means economic distress is less likely to translate into financial distress, according to new Goldman Sachs research. Mortgage delinquency rates have actually declined in the United States and are very low in New Zealand and Canada.

The labor market is weakening, but the rise in unemployment seen after the financial crisis is unlikely. This is because the demand for labor has a long way to go to catch up with the supply. Earlier this year, the two had taken a serious hit, with many vacancies being filled around the world. OECD According to our calculations, it peaks at 30m. Now that demand is down, vacancies, not jobs, seem to be the burden again. The number of unfilled positions is estimated to have decreased by a factor of 10 from the high, while the number of filled posts is static.

However, much depends on the course of inflation. Central banks are willing to induce recessions to curb inflation. As Federal Reserve Chairman Jerome Powell noted earlier this month, higher interest rates could “provide some relief in the labor market.” “We think so [raising rates] Demand will fall and we will not pretend to be pain free,” warned European Central Bank chief Philipp Lane. Both economic theory and data from the past 70 years suggest that gdp It is associated with a significant slowdown in the rate of inflation. However, the time lag between tightening monetary policy and lowering inflation is not well understood. Central banks may have to cause more pain than currently anticipated.

Lower energy and food prices have helped keep headline inflation down in some countries. America’s recent figures for October were better than economists had expected. Inflation “surprises”, in which reported data exceed expectations, remain common across wealthy nations (see Figure 4). Figures released on November 16 showed UK inflation at 11.1% in October, beating economists’ expectations. “Core” inflation, which is more reflective of underlying price pressures, is rising almost everywhere. On his three dimensions of breadth, wages and expectations, inflation in rich countries is rising, not falling.

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.

The third dimension is expectations. Consultancy firm Alternative Macro Signals runs millions of news articles in multiple languages ​​through a model that builds a “news inflationary pressure index.” The index, which has proven to be a good predictor of official numbers, is still on the rise. Similar evidence comes from Google search data, which suggests that global interest in inflation has never been higher.

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.

painful ignorance

Everyone can agree on one thing about the past year. It turns out that economists have little understanding of inflation, including what causes it and what sustains it. Economists, therefore, may also struggle to predict when inflation will subside. Optimists hope that the price rally will slow down sooner than expected and that prices will surprise people again. However, it seems likely that inflation will continue even as the economy slows. This leaves policy makers with tough choices to make. Tighten the economy more and more, or let prices skyrocket.

Editor’s note (16 November 2022): This article has been updated with the latest UK inflation rates. Even a global recession may not be able to crush inflation

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