World triumphs over inflation crisis?
In the aftermath of the economic turmoil caused by the pandemic, geopolitical chaos looms as a potential catalyst for another inflationary shock. Despite inflation slipping down voters' lists in favour of other priorities, according to surveys, the challenge of managing inflation remains a significant concern for policymakers.
In the US, the Federal Reserve is expected to cut interest rates later this month, according to Paul Krugman in The New York Times, in an attempt to combat persisting inflation. This move comes after a series of aggressive interest rate hikes last year, which, while effective in reducing inflation, did result in economic challenges that raised recession risks.
In the UK, investors are optimistic about more Bank of England rate cuts to end the year, a sign of continued faith in the central bank's ability to manage the economy amidst inflationary pressures.
Recent "inflation-busting trade union pay" agreements have been made, signalling a renewed focus on addressing the cost-of-living concerns of households. However, these agreements could potentially exacerbate inflationary pressures, especially if they lead to wage-price spirals.
The US economy, despite strong growth of late, has shown little evidence of cooling down due to interest rate rises. US consumers' expectations of future inflation have returned to pre-Covid levels, a concerning sign that inflation may not be tamed and could return with a vengeance.
In October, the average UK household energy bill is set to rise by £149, further fuelling inflationary concerns and adding to the financial burden on households.
The experience of countries like Canada and Mexico highlights the effectiveness of flexible inflation targeting frameworks in anchoring inflation expectations and contributing to price stability. These countries' central banks acted decisively and timely in raising rates, maintaining credibility and resilience in their economies even during inflation spikes.
However, some critiques argue that certain central banks, especially early in the inflation surge, maintained loose monetary policies too long, enabling inflation to rise and later necessitating aggressive rate hikes that strained households and small businesses. This view sees central banks as failing to prevent inflation without causing economic hardship, partially due to political and government debt dynamics influencing central bank actions.
The International Monetary Fund’s outlook suggests that while inflation is expected to moderate and growth is projected to continue, the withdrawal of fiscal support and high debt levels pose risks to economic activity. This delicate balancing act for central banks between controlling inflation and avoiding recession is a complex trade-off that will continue to shape economic policy in the coming months.
Vice President Kamala Harris may struggle to convince voters that the Democrats have done a good job managing the economy, given these ongoing inflationary pressures and economic challenges. The success of her efforts will likely depend on the effectiveness of the administration's economic policies in addressing these concerns and restoring confidence in the economy.
