2023-07-08 08:49:01
Los central banks are raising interest rates tohe fastest pace since the 1990s, but the most severe bout of inflation in the last generation is still out of control.
Although many were slow to realize the magnitude of the problem that this surge of inflation would pose, representatives of the 20 largest economies in the world they raised interest rates by an average of 3.5 percentage points each, since borrowing costs began to tighten.
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However, neither the president of the United States Federal Reserve (Fed), Jay Powell, nor the president of the European Central Bank (ECB), Christine Lagarde, they expect inflation to return to their common target of 2 percent before the beginning of 2025.
Although overall consumption rates fell, top central bankers cite higher core inflation, tight labor markets and pressures in the service sector as evidence that prices will continue to rise for some time. So, What explains the persistence of inflation in the face of aggressive increases in interest rates?
A scarce workforce. enlarge
Against the backdrop of a two-year battle against inflation, it presents a muddled situation that casts an uncomfortably bright spotlight on the banks central, both individually and collectively. many now are drawing the ire of impatient politicians and ordinary citizens pressured by higher prices and mortgage rates.
That has led to a consensus among major central banks that interest rates need to stay high for longer. Even the Fed pause is seen by most as a temporary pause before rate hikes resume.
With more delay than usual
Monetary policy is always behind schedule, as the impact of a single rate increase takes about 18 months to kick in fully on consumer spending patterns and prices.
Those responsible for the formulation of monetary policy they started raising rates less than a year and a half ago in the United States and the United Kingdom, and less than a year in the euro area. Just a few months ago they broke above the neutral rate, that is, the level at which they actively cap the economy.
THE DATA
It was inflation in the United States in May.
The Fed expects to close at 3.8 percent.
But some central bankers and economists they believe that the delays may become longer —and the hardening effect less potent— this time.
“Monetary policy may not be as powerful as it was several decades ago,” says Nathan Sheets, chief economist at US bank Citi.
In his view, despite rising borrowing costs, growth is surprisingly resilientespecially in the service sector, which constitutes the bulk of economic output in most countries.
“Wealthier nations and the world economy as a whole absorbed surprisingly well the extraordinary rate increases dice Sheets.
The long-term displacement of manufacturing sector towards services, which require less capital, could also mean a slower transmission of a more restrictive monetary policy.
Structural changes in important parts of the world economy —including the housing and labor markets—between now and the 1990s may explain why rate increases had a much faster and sharper impact on inflation at that time.
A gradual improvement. Inflation continues to fall in Mexico, settling at 5.2% expand
The importance of housing
Changes in the housing market can be key to explain why interest rate hikes take longer to make themselves felt in global inflation indicators.
In several countries, the proportion of households that own or rent increased. Fixed-rate mortgages are now more popular than flexible mortgages, where the Fed’s interest rate hikes affect the purchasing power of households.
In the United Kingdom, the proportion of households owning a property with a mortgage fell from 40 percent in the 1990s less than 30 percent. Those with an adjustable-rate mortgage went from 70 percent in 2011 to just over 10 percent this year.
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Andrew Bailey, governor of the Bank of England, said last week that these trends mean that “as a result, the transmission of monetary policy is going to be slower.”
Labor markets are tight
The fallout from the pandemic on hiring trends is still being felt. Labor shortages remain widespread, especially in the service sector, which drives wage growth and, in turn, inflation.
Less purchasing power. enlarge
Christine Lagarde said last week that companies in the service sector could be “accumulating labor”, fearful of not being able to hire if growth strengthens. The sector could be “insulated from the effects of policy tightening for longer than in the past,” the ECB president said.
The riddle for central bankers
The initial insistence of central bankers that inflation would be short-lived it delayed discarding decades of aggressive and ultra-loose monetary policy.
Those delays maybe made inflation even harder to beat with higher ratesas price pressures went from being a problem affecting a small number of products, which were hit by supply chain bottlenecks, to a much broader phenomenon, affecting almost all goods and services.
A little delay. enlarge
The Bank for International Settlements (BIS)often dubbed the central bankers’ bank, warned last year that if interest rates are raised too little, or if their effect is delayed too long, countries could slide into an environment in which high inflation becomes the norm.
The risk is that a return to 2 percent inflation will force central banks to raise borrowing costs to the point of jeopardize the health of the global financial system.
The failure of several mid-size US banks and the problems of Credit Suisse earlier this year were attributed partly to rising borrowing costs.
If the growth also disappears, the economists expect more pressure on central bankers who are tasked with trying to control inflation.
Jennifer McKeown, chief European economist at Capital Economics, now expects higher interest rates “push most advanced economies into recession in the coming months.”
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