It’s a World of Inflation
Prices are still rising too fast for comfort in many major economies, and policymakers across the globe are trying to wrestle them under control.
From Melbourne to Manchester to Miami, people are struggling under the weight of hefty price increases for the things they buy each day.
The worst spike in inflation that many advanced economies have seen in decades underscores the global forces driving prices higher, namely the disruptions set in motion by the coronavirus pandemic.
The stakes are high for policymakers around the world, who are facing similar problems. To try to get inflation under control, central bankers have rapidly lifted interest rates, trying to slow their economies in hopes of cooling prices.
If they fail to bring inflation under control, it could result in a destabilizing period of spiraling prices. Higher and less predictable inflation would squeeze families and businesses and make it harder to plan for the future.
But if economic policymakers react too aggressively — and all at once — it could crimp global economic growth to a painful degree. That could raise the risk of a major recession that shutters businesses and puts people out of work. Given the potential cost, policymakers do not want to overdo it, harming their economies more than is necessary to bring down inflation.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Many central banks are approaching those trade-offs similarly: They are focused on fighting stubbornly high inflation. Officials fear that if they let inflation persist for too long, it could become entrenched and prove even more painful to stamp out.
The leaders of major central banks in North America, Europe and elsewhere have said recently that they expect to continue raising rates, as inflation is moderating but remains well above their typical target rates — which are often around 2 percent.
Officials at the U.S. Federal Reserve have raised their policy rate to just above 5 percent from near zero in March 2022, and they forecast raising it two more times in 2023, to just above 5.5 percent. Policymakers at the European Central Bank, which sets policy for the 20 countries that use the euro, also expect to continue raising rates, which have reached the highest level since 2001. The Bank of England recently surprised investors by raising rates more than expected with its 13th consecutive increase.
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Inflation surged substantially in the United States in 2021 but has come down more quickly than in many parts of Europe. That’s in part because Europe has more significant exposure to the effects of Russia’s invasion of Ukraine, which has pushed up food and energy prices sharply.
But stripping out those volatile prices, so-called core inflation looks stubborn across many countries. That underscores the common problem facing policymakers: Slow-moving prices for services are climbing much more quickly than before the pandemic.
Prices for labor-intensive services like medical care and education tend to track wage gains and the strength of the overall economy. In short, they are the type of price increases that central banks can do something about by raising rates to slow down borrowing, curb spending and ultimately cool the economy.
At a recent gathering of central bankers, Jerome H. Powell, the Fed chair, said that for inflation in the services sector, such as hotels, restaurants and banks, “we are not seeing a lot of progress yet.
