What can those suffering from inflation glean from those adept at controlling it?
Insights from experts adept at controlling inflation: What strategies can those affected glean?
Are there glimmers of hope that the inflation nightmare is coming to an end? In the OECD countries, the rate of consumer-price inflation has dropped from its October 2022 peak of 10.7% to 6.2%. Similarly, wage growth has been slowing. Investors are optimistic that further progress will be made so that central bankers can reduce interest rates.
They could be being too optimistic. Last year, The Economist conducted research to determine the degree of "inflation entrenchment". This indicated that the issue, which had initially arisen in America, was beginning to spread to the rest of the developed world. To further examine the matter, five measures were studied: core inflation, unit labour costs, "inflation dispersion", inflation expectations, and Google-search behaviour. These elements were used to rank ten countries in order to create a "inflation-entrenchment" score.
The following table displays the average ages of the population in different countries and the percentage of population over 65 years old in 2018 and 2019:
Country | Average Age | % Over 65 in 2018 | % Over 65 in 2019
---|---|---|---
Australia | 78 | 5.1% | 5.2%
Britain | 68 | 6.1% | 3.0%
Germany | 60 | 5.1% | 2.4%
Canada | 58 | 3.7% | 5.7%
United States | 58 | 4.4% | 5.4%
France | 48 | 3.3% | 4.3%
Italy | 34 | 4.0% | 3.9%
Spain | 34 | 4.7% | 3.9%
South Korea | 16 | 3.3% | 3.1%
Japan | 10 | 2.8% | 1.5%
The figures point to a continued prevalence of inflation, potentially more severe than in 2022. Canada, whose score was the most severe last May, would have only been third-worst this year. The situation is particularly dire in Anglophone countries such as Australia and the UK. However, Italy and Spain are doing relatively well; and in Japan and South Korea, the battle against inflation may be close to being won. What can those nations still struggling learn from the successful ones?
Australia is the worst performing country in the sample, and its labor market is very active. In the past year, the cost of labor, which is determined by how much employers pay employees for each unit of output, has increased significantly by 7.1%. Moreover, no other country has more price differences than Australia, which is determined by the share of consumer prices that have risen by more than 2% annually.
The research conducted by the Federal Reserve Bank of Cleveland, Morning Consult, and Raphael Schoenle of Brandeis University has created a cross-country dataset on the public's expectations concerning price changes. Regarding this, Canadians are expecting a 5.7% increase in consumer prices in the next year, and are also the most active in searching for terms associated with inflation. Meanwhile, British citizens are experiencing a 6.1% annual core inflation rate, the highest amongst the countries surveyed. Finally, the United States of America is neither doing very poorly nor very well on any measure.
The possible explanation for this persistent inflation could lie in the more generous fiscal stimulus that Anglophone countries have provided in 2020-21, which was roughly 40% more than in other wealthy countries. This stimulus was focused mainly on direct payments to individuals, in comparison to measures to support businesses, which could have further increased demand. This connection between fiscal boost and inflation during the pandemic is supported by a new study from Robert Barro from Harvard University and Francesco Bianchi from Johns Hopkins University.
Monetary policy has also had an effect. When covid hit, central banks in the US, Australia, Britain and Canada reduced interest rates by an average of one percent, which was twice as much as in other countries with high incomes. This extra support could have increased inflation. Over the past 12 months, nations that speak English have seen large amounts of migrants, which can be inflationary in the short-term due to them vying for housing and causing rent prices to go up. Goldman Sachs approximates that the current annualised net-migration rate of 500,000 people in Australia is resulting in an extra half a percent of inflation.
Why are other countries doing better in comparison? Japan and South Korea may have low inflation expectations for the upcoming year. This could be due to their recent history of low inflation before the pandemic. In contrast, some countries such as Britain have experienced inflation surges in the past, which may have created an inflationary mindset.
In Europe, the outlook for inflation has improved greatly since its greatest extent. Nations like Italy and Spain were particularly fortunate, as policy and chance made the increase in energy prices not as dramatic in those countries as in others. This may have stopped people from predicting further inflation.
France is situated between the Anglosphere and Asia, a nation with an increasingly positive economy. In comparison, Germany is a different story. Historically, its citizens were renowned for their wage control, but the present job market is so tight that labour costs are soaring more than 7% annually. The variance in prices is also very extensive. This must be a source of pride to many in European countries, as German economists are now gazing south with admiration.
