Economic and political crises often have many causes. But many people today are driven by one key factor: the rising cost of living.
In Britain, Prime Minister Liz Truss is facing calls to step down after just six weeks in office as a now-abandoned tax cut plan that experts warn will exacerbate inflation, if not to say economic devastation. Europe is bracing for a spike in energy costs this winter. In the US, the Federal Reserve is considering more aggressive steps to reduce price increases, but its move could also trigger a recession, as The Times reports. yesterday’s report.
This chart by my colleague Ashley Wu shows how rapidly prices have risen in many of the world’s advanced democracies. Officials typically aim to keep inflation around 2% – enough to keep the economy afloat but still maintain price stability. Many countries are at least four times higher than that rate:
So what happened? It is helpful to think of inflation as two related crises rather than one. First, the global disruption caused by the pandemic and Russia’s invasion of Ukraine have caused inflation around the world to spike. Second, some countries – especially the US – also make inflation worse for themselves through domestic policy decisions. In today’s newsletter, I’ll explain both.
Global trend
From 2020 to early 2022, Covid largely explains the trends on the chart. The pandemic and its outbreak have created supply shortages (factories closed and logistics chains cut) and spikes in demand (for items like home furniture and tickets). plane). That imbalance has fueled the price increase.
The trend of the chart shows a change near the beginning of the year. From last year to early 2022, prices in the US increased faster than in other countries. But the EU and UK are currently leading, because The data released today proves. (The exception is Japan, which has faced a stagnant economy and deflation for decades.)
Europe began to overtake the US as the war in Ukraine created its own disruption. The Russian invasion closed Ukraine – one of the world’s breads and a major grain exporter – and food prices rose. And Western sanctions in response to the war have cut off Europe from Russian oil and gas, on which the continent depends so much. So energy prices around the world also go up.
According to this second ranking by Ashley, Europe has been hit the hardest. War affects energy costs in other parts of the world, but countries less dependent on Russian oil and gas have adapted more quickly:
Europe’s challenge now is to find alternative energy sources. The construction of infrastructure, after supplying pipelines and terminals for Russian oil and gas, will take a long time.
Even countries with larger buffers from supply shocks are taking steps to address energy prices. The Department of Energy is planning frees up 15 million barrels of oil from strategic reserves.
Domestic causes
Government responses to global crises also affect inflation, sometimes making it worse than it otherwise would be.
The initial instinct of policymakers in times of pandemic is to preserve the economy. To prevent Covid from causing a deep recession, they enacted relief measures. In some cases, they may have gone too far: The aim of the stimulus packages is to lift spending and demand, keeping the economy afloat. But if supply can’t keep up with new demand, prices will rise.
Once they do, central banks are also slow to respond – believing that inflation will drop as the impact of global disasters like the pandemic fades. Therefore, inflation increased uncontrollably.
The United States suffers from both problems. The US spent the most of any country in the world on economic relief, potentially leading to too much demand and subsequently worse inflation. And for much of 2021, the Federal Reserve sees rising prices as a temporary phenomenon; it did not acknowledge that inflation lasted until the end of last year.
The combination of overspending and inactive central banks helps explain why the US had the highest inflation rates among its peers until Russia invaded Ukraine.
If there were no war, the United States would still suffer more than other countries. The US still has a higher core inflation rate, excluding food and energy prices, than many of its peers – showing it. There’s a deeper problem compared to major global events that drive up food and energy costs. The labor market in particular remains hot, with an unusually high number of jobs per unemployed worker. These are the problems the Fed is trying to solve without causing a deep recession (like me explained in this newsletter).
To put it simply: Inflation is a big deal. But in Europe, the cause and solution has to do with supply. And in America, they’re demand-oriented.
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ARTS AND IDEAS
Time to book that flight
If you are traveling during the holidays, buy your flight tickets as soon as possible. “The best times to book Thanksgiving and Christmas flights are June and July,” said Scott Keyes, founder of Low-Cost Flights. .”
It’s one of the tips from The Times’ new guide to holiday travel. Domestic travel will be especially expensive this year – booking a Thanksgiving flight to Cedar Rapids, Iowa, costs more than it does to Lisbon at the same time. But there are ways to save money. The guide covers some of the cheapest days to fly, many of which fall on a Monday.
