(MENAFN- Gulf Times)
Inflation came back faster, rose more sharply, and proved more stubborn and persistent than the major central banks had originally believed possible. After initially making headlines in the United States, the issue has become a centerpiece of policy discussions in many other advanced economies. In 15 of the 34 countries classified as AE by the International Monetary Fund’s World Economic Outlook, 12-month inflation through December 2021 was above 5%. Such a sudden and shared jump in high inflation (by modern standards) has not been seen in over 20 years.
This inflationary surge is not limited to rich countries either. Emerging markets and developing economies were hit by a similar wave, with 78 out of 109 EMDEs also facing annual inflation rates above 5%. This share of EMDEs (71%) is about twice as large as it was at the end of 2020. Inflation has therefore become a global problem – or almost, with Asia so far immune.
The main drivers of the inflation spike are not uniform across countries, especially when comparing AEs and EMDEs. Diagnoses of “overheating,” prevalent in American discourse, do not apply to many EMDEs, where fiscal and monetary stimulus in response to Covid-19 was limited, and economic recovery in 2021 was well behind schedule by compared to the rebound of the AE.
Additionally, the patterns of crisis and recovery induced by the pandemic differ significantly across countries, with recovery defined as the return of an economy to its 2019 per capita income level. About 41% of High-income EAs met this threshold at the end of 2021, compared to 28% of middle-income EMDEs and only 23% of low-income countries.
But the disparity between advanced and developing economies is even greater than this comparison suggests, as many EMDEs were already experiencing declines in per capita income before the pandemic, while EAs were mostly hitting new highs. While many EMDEs have downgraded their estimates of potential output over the past two years, there is no indication that their inflationary pressures are primarily due to overheating following large stimulus measures.
A common development in advanced and developing economies is the rise in commodity prices as global demand rises. By January 2022, oil prices were up 77% from their December 2020 level.
Another major issue affecting advanced and developing economies alike is global supply chains, which continue to be hit hard by the events of the past two years. Shipping costs skyrocketed. And unlike the oil supply shock of the 1970s, Covid-19 supply shocks are more diverse and opaque, and therefore more uncertain, as the World Bank’s latest Global Economic Outlook points out.
In EMDEs, currency depreciation (due to lower foreign capital inflows and downgraded sovereign credit ratings) has contributed to inflation of imported goods. And since inflation expectations in EMDEs are less anchored and more sensitive to exchange rate movements than in EAs, the transmission from exchange rates to prices tends to be faster and more pronounced.
Another important factor is food price inflation. In 2021, 12-month increases in food prices exceeded 5% in 79% (86 out of 109) of EMDEs. Although the AEs were not immune to the rise in food prices, only 27% of them experienced price increases of more than 5%.
Worse, food price inflation also typically hits low-income countries (and low-income households everywhere) hard, amounting to a regressive tax. Food represents a much larger share of the average household consumption basket in EMDEs, which means that inflation in these economies is likely to prove persistent. Higher energy prices today will translate directly into higher food prices tomorrow (through higher costs for fertilizers, transportation, etc.).
Although most EMDEs no longer have fixed exchange rates – as they did during the inflation-prone 1970s – the possibilities for “truly independent” monetary policy in small open economies remain limited, despite floating exchange rates. The risk of them importing inflation from global financial centers is not a relic of the past.
Indeed, the most salient feature of current inflation is its pervasiveness. With no global policy options to resolve supply chain disruptions, the task of fighting inflation is left to the major central banks. While the US is poised for a modest tightening (by historical standards) in 2022, this is unlikely to be enough to dampen price growth. As Kenneth Rogoff and I document in a 2013 article, much of the persistence of inflation in the 1970s stemmed from the US Federal Reserve’s tendency to do too little, too late (until the 1970s). arrival of Paul Volcker).
Admittedly, a faster and more robust policy response from major central banks would not be good news for EMDEs in the near term. Most would face higher financing costs and debt crises could become much more likely for some. However, the longer term costs of postponing action would be greater. Because the United States and other advanced economies failed to tackle inflation quickly during the 1970s, they eventually needed much more draconian policies, leading to the second deepest post-war recession in the United States, as well as a debt crisis in developing countries.
As the old saying goes, “A stitch in time saves nine”. In the meantime, the resurgence of inflation will continue to reinforce inequalities, both within and between countries. – Project union
• Carmen Reinhart is Chief Economist of the World Bank Group. Clemens Graf von Luckner is an economist at the World Bank.
Last update: February 11, 2022 23:59
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