2022 was the year of brutal inflation
“Linflation This is the problem of our time. New York Federal Reserve Bank Governor John Williams said in late 2019, backing his then-dominant view: Fast forward to the present and the problem is exactly the opposite.Almost every country in the world has deal with soaring prices Things are almost certain to improve next year, but economic growth comes at a serious price.
Where 2022 has been an anomaly is the breadth of price pressures. Global inflation will end the year at around 9%. High inflation is a recurring challenge for many developing countries. However, the last time inflation rose to this level in a rich country was in the early 1980s.of America Consumer prices are on track to rise by about 7% in 2022, the highest in 40 years. In Germany, the rate approaches 10%, with double-digit inflation for the first time since 1951.
The common factor driving inflation everywhere was the rising cost of fuel and food. Prices for many consumer goods were already on an upward trend at the beginning of 2022 due to the lingering impact of covid-19 on supply chains. Russia’s invasion of Ukraine in February caused further turmoil. The cost of oil has risen by a third as Western countries imposed sanctions on Russia, a major oil producer. Fertilizer and transportation costs, as well as Russia’s blockade of grain exports from Ukraine, a major wheat producer, have also sent food prices soaring. Economically speaking, this corresponds to a classic supply shock. Sudden increases in the prices of key commodities quickly permeated the daily lives of citizens around the world.Millions of people in Europe, long dependent on Russian gas, will struggle to afford heating this winterAcross all regions, food and fuel will account for more than half of inflation in 2022 on average (see graph).
If inflation were just a supply-side phenomenon, it would have been painful enough. But the most worrying development for central bankers was the seeping of pressure on the “core” component of the price index: volatile non-food and energy goods and services. Rising core prices indicated that inflation was gaining momentum on its own. It also pointed to causes other than the oil shock. Labor markets are currently very tight in many countries. This is partly due to the wave of early retirement due to COVID-19. As a result, businesses are paying higher wages to attract workers, fueling inflation. In the United States, where the rise in core inflation was particularly steep, an additional culprit was the excessive stimulus provided by both the government and the Fed during the height of COVID-19. Much of 2022 has led to demand overheating, with actual private consumption higher than pre-pandemic trends. Needless to say, the country with the lowest inflation rate was China. The company’s “coronavirus-free” strategy has pushed spending well below pre-pandemic trends.
Almost everywhere there was fear that higher prices would reset people’s inflation expectations and lead them to demand higher wages. Such dynamics, known as wage-price spirals, make inflation much harder to eradicate. The mere threat of dynamics was enough to spur central banks into action. The Fed has been the most aggressive, raising interest rates from his March low of zero to his 4% and above today. From Stockholm to Sydney, the wealthy central banks of the world followed suit.
One way to look at the 2023 inflation outlook is the duel between rebounding supply and declining demand. Encouragingly, some of the factors that fueled inflation in early 2022 are starting to fade. Prices of consumer goods fell as supply chains returned to normal. Oil costs are back to where they were a year ago, partly thanks to a rebound in production. Tightening monetary policy works by shutting down demand, which is starting to happen as well. The most interest rate sensitive sectors have suffered the most. A sudden chill in the once ferocious real estate market has dried up deals. If the recovery in supply (importantly, including willing workers) is large enough and fast enough, central banks may be able to pull off tightening before triggering a deep recession. But for now, it seems likely that they will have a real hit to the global economy. In 2023, inflation fears may give way to unemployment fears. ■
https://www.economist.com/finance-and-economics/2022/12/21/2022-has-been-a-year-of-brutal-inflation 2022 was the year of brutal inflation
