Inflation rates are rising in every country but not equally so;
Higher inflation is here, but is it here to stay? You’d be forgiven if you are confused by the number of conflicting predictions, the different proposed strategies to curtail the rise in the cost of products and services, and even by whether inflation is really such a bad thing or, rather, a sign of a healthy economy. And all that without even beginning to consider inflation’s ugly siblings: stagflation, hyperinflation, and deflation.
Some of these questions are fairly easy to answer. Will inflation stay with us for very long? We don’t know. Can inflation be good? It depends. Do we have the means to keep it under control? Maybe. The truth is that the primary tool used by central banks to bring inflation down—raising interest rates—can sometimes potentially translate into the classic case of the cure being worse than the disease.
If low rates encourage consumers and business to borrow and spend more money, the opposite will obviously happen with higher rates—and when spending drops, so do prices and inflation. The problem is that intervening either too little or too much, too soon or too late, can unleash a number of unpleasant side effects: for example, increasing interest rates too rapidly can hurt fragile economies, damage up-and-coming businesses that rely heavily on credit to get started, worsen unemployment, and erode economic growth—in other words, cause a recession. In that sense, stable, moderate inflation is a sign of a healthy economy: as the economy grows, wages and consumer demand grow too; to meet increased demand, businesses gradually start hiring more people, buying more materials and supplies, and charging proportionally more for their products.
When it comes to interest rates, hitting the perfect figure at the perfect time is tricky. Similarly, reducing the purchase of government-backed bonds and therefore the money supply in the economy—another strategy that central banks use to control inflation—needs careful calibration.
The truth is that, just as there is no unique variable that can help predict inflation, there is also no sure-shot sequence of actions that can bring it down with the absolute certainty that no unwanted repercussion will follow. This is why, today, no serious expert is betting on how long this period of rising costs will last. Just months ago, encouraged by the vaccine rollout in many countries, central bankers around the world seemed more optimistic: they often described the first spikes in inflation as just “blips” bound to disappear soon. They were right about the main reason for those blips: Covid-19 caused serious disruption to the global economy—supply-chain bottlenecks meant that demands for what consumers and firms wanted and needed could not be met which prompted demand to far exceed supply, driving prices upwards. What they could not imagine is that the disruption would last for years, that new variants of the virus would continue to bubble up, that so many people would campaign against mask mandates and vaccines, and that global distribution of vaccines would be so unequal and uneven.
But there is also another reason why central bankers tended to downplay the risk of inflation. The ability to reassure consumers and businesses that things are—and will be—fine is in itself a crucial part of their job description, because once people start believing that prices will surge, it becomes a self-fulfilling prophecy as people scramble to get what they can to beat impending price hikes. A rise in prices is often an effect of a rise in fear as much as it an effect of rising costs.
To explain why we need to go back to some basics. First of all: bringing inflation down does not mean that prices will go back to where they once were—they will just stop growing at an accelerated pace. It is also important to point out the distinction between overall inflation and core inflation: the first includes food and energy prices, which are more sensitive to seasonal factors and fluctuate more rapidly while the latter casts a much longer shadow.
When the fear of inflation spreads, a business that does not change its prices often—for example a car manufacturer—will safeguard its profit margins by getting ahead of expected future inflation (and if it has already started experiencing higher costs, making up for past inflation as well). Core inflation sticks longer because the price tag of a car changes less often than that of its fuel at the gas station (or bananas and candy bars at the supermarket). It is at that point that words like “blip” start appearing less and less in the headlines and terms like “temporary” and “transitory” show up more often—how temporary and transitory generally remains unclear. Something else is happening as well: wages are now rising in many countries. When workers expect to pay more for everything, they ask for higher wages to match the higher cost of living; when firms pay their workers more, they mark their prices up. Most importantly, when wages go up, they seldom go back down.
What happens, then, if the inflation keeps growing and growing? Depending also on various other circumstances—and many important economists have already sounded the alarm in the United States and elsewhere—you could wind up in a stagflationary situation where economic growth slows, unemployment remains high and inflation remains at elevated levels. Even worse (much worse), although very uncommon, is the specter of a hyperinflation scenario, where prices grow uncontrollably sending the value of the currency into freefall. The case of Weimar Germany after World War I comes to mind. Yet, hyperinflation has not been entirely relegated to history books: Zimbabwe has been struggling with spiraling inflation for over a decade; Venezuela—the IMF estimates—will hit this year an inflation rate of 2,700% (which, believe it or not, is a stellar improvement compared to the five-digits rates of just a few years ago); Sudan is forecast to come second at about 200%; many other nations will experience a percentage surge in prices many times over the 2% level that the major central banks see as the optimal inflation target. Hyperinflation also provides the clearest proof that expectations play a fundamental role in determining the price of goods and services: when people believe that their currency will be worth much less tomorrow, it is often just a matter of time before it becomes virtually worthless (which, in passing, also explains the appeal of alternatives such as Bitcoin and other cryptocurrencies as a hedge against inflation.)
The opposite extreme, persistent deflation—which occurs when prices fall— is worrisome because it is a symptom of a weakening economy characterized by anemic consumer spending and low production levels (which leads to falling wages, which causes even lower demand for goods and services, which leads to even lower prices). Like inflation, not all deflations are alike: Greece—which during the debt crisis experienced a deflationary phase as a result of the wage and pension cuts part of its bailout terms—has fallen back into negative inflation shortly after the beginning pandemic; Japan has been stuck in this vicious cycle for two decades. And then there is Switzerland, which suffers, but also benefits, from deflation of its own making: over the past several years, the country managed to sustain its exports by countering the appreciation of its currency through super-low interest rates—yet, baffling many economists, avoiding at the same time the most dramatic effects of deflation (such as a crippling contraction in economic activities or high unemployment).
All these peculiar scenarios demonstrate why there is no one-size-fits-all solution when it comes to the many sides of inflation. Meanwhile, according to the IMF, inflation is set to increase this year in 144 countries out of 191 compared to 2020, when inflation increased in just 71 nations versus a year earlier. Will this season of global higher inflation last much longer? If we have learned anything over the past two years, it is that it is very difficult to predict the future when it depends to such a great extent on the whims of a virus. Central bankers will have to constantly rely on a wide variety of data to fine-tune their assessments and policies—kick the tires of the economy as we go, so to speak.
Inflation Rates by Country
|23||Democratic Republic of the Congo||35.7||29.3||4.7||11.4||9.4|
|28||São Tomé and Príncipe||5.7||7.9||7.7||9.8||8.3|
|76||Central African Republic||4.2||1.6||2.7||2.3||3.7|
|77||Papua New Guinea||5.4||4.7||3.7||4.9||3.6|
|135||United Arab Emirates||2.0||3.1||–1.9||–2.1||2.0|
|138||Republic of Congo||0.4||1.2||2.2||1.8||2.0|
|141||St. Vincent and the Grenadines||2.2||2.3||0.9||–0.6||2.0|
|144||Hong Kong SAR||1.5||2.4||2.9||0.3||1.9|
|148||Bosnia and Herzegovina||0.8||1.4||0.6||–1.1||1.7|
|155||Antigua and Barbuda||2.4||1.2||1.4||1.1||1.6|
|168||West Bank and Gaza||0.2||–0.2||1.6||–0.7||1.3|
|175||Trinidad and Tobago||1.9||1.0||1.0||0.6||1.0|
|189||St. Kitts and Nevis||0.7||–1.0||–0.3||–0.6||–1.0|
Source: International Monetary Fund, World Economic Outlook Database, October 2021 (Afghanistan, Argentina, Lebanon, Somalia and Syria not included).