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Ultra-tight policies still struggle to keep inflation under control

Mewe in october Investigated the fate of Hykelandia. Central banks threw the kitchen sink on inflation in a group of eight countries: Brazil, Chile, Hungary, New Zealand, Norway, Peru, Poland and South Korea. They started hiking rates well before the US Federal Reserve and have hiked rates more forcefully on average. But I found little evidence that their determination was paying off in lower inflation. The Hykelandia experience raised questions about how quickly monetary policy can control prices. Federal Reserve policymakers have been watching closely.

The latest data offer little reason for optimism. Hykelandia’s inflation problem is still getting worse. “Core” inflation excludes variables such as energy and food, so it is a better measure of underlying pressures. In December, it hit a new high of nearly 10% year-on-year (see chart). Rising borrowing costs are crushing the economy, though not enough to crush Hykelandian inflation. Output is contracting at an annual rate of about 1% from his 5% growth early last year.

In some areas of Hykelandia, central bankers have more luck. Brazil’s core inflation rate is now clearly lower. There are signs of improvement in South Korea. But not much progress has been made elsewhere. Average wages in Chile are rising by about 10% a year, too fast when productivity growth remains weak. Prices are skyrocketing in Hungary. The annual core inflation rate rose from 19% in August to 25% in December. Hykelandia inflation is estimated to be more than one-fifth of his price in his basket, but over the previous year he has risen by more than 15%.

When will hykelandia prices return to normal? Recent data suggests double-digit inflation is unlikely. But the longer high inflation lasts, the more the citizens of Haikelandia expect it. Just ask the Hungarians. Many of them are obsessed with the cost of living. They now Google “inflation” as much as “Viktor Orban”.

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https://www.economist.com/finance-and-economics/2023/02/02/super-tight-policy-is-still-struggling-to-control-inflation Ultra-tight policies still struggle to keep inflation under control

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