The Economist - UK (2022-04-16)

TheEconomistApril16th 2022 Finance&economics 63

U

nhappyeconomiesareoftenun­

happyintheirownways.Today

most,however,arebattlinga common

foe:a surgeinconsumer­priceinflation.

AccordingtofiguresreleasedonApril

12th,consumerpricesroseby8.5%in

MarchinAmerica,comparedwitha year

earlier—thefastestpacesince1981.In

Britainandtheeuroareaconsumer

pricesroseby7%and7.5%,respectively,

intheyeartoMarch.Acrossmostrich

andemergingeconomies,inflationis

nowwellabovecentralbanks’targets.

Insummer2020,aftera periodof

too­lowinflation,America’sFederal

Reservesaidthatit wouldtoleratein­

flationthatwasa littleaboveits2%

targetfora time,inthehopeofmaking

upforundershoots.Inthesubsequent 20

months,consumerpriceshaveblown

pastwheretheywouldhavebeenhadthe

Fedachievedits2%targetonaverage,

puttingpressureonthecentralbankto

raiseinterestratesfast.

Inmanyplacesa bigchunkofcurrent

headlineinflationreflectsrisesinenergy

prices,whichsoaredafterRussia’sin­

vasionofUkrainejoltedcommodity

markets.InMarchtheseexplainedabout

halfoftheeuroarea’sannualinflation

rate.InAmerica,however,thepressureis

broad­based.“Core”consumerprices,

whichstripoutfoodandenergyprices,

roseatanannualrateof6.5%inMarch.

Coreinflationisonewaytoassessthe

breadthofpricesurges.Anotheristo

excludetheitemsforwhichpriceshave

swungthemost,typicallyowingtoidio­

syncraticfactors.TheDallasFed,for

instance,constructsa “trimmedmean”

measure,whichsortsthecomponentsof

thepersonal­consumptionexpenditures

index(theFed’spreferredgaugeofpric­

es)bytheirinflationrates,anddropsthe

bottom24%andthetop31%.Onthat

measureinflationhasrisenby3.6%—

stillabovethecentralbank’starget,but

bymuchless.

Theproblemwithtrimmedmeans,

however,isthattheyinvolveabrupt

cliffs,loppingoffthetopandbottomof

theindexwhilegivingadjacentpercen­

tilestheirfullweight.InNovemberThe

Economistdevisedanalternativeindex,

whichappliessmoothweights.Compo­

nentswithinflationnearthemedianget

themostemphasis,andthosewiththe

mostdramaticpricechangesgetthe

least.Ourmeasuresuggestsaninflation

rateofcloseto6%—hotenoughtokeep

JeromePowell,theFed’schairman,

sweatingatnight.

Consumerprices

Pervasive problems

InflationinAmericaisbecomingmorebroad-based

Pressure gauges

Sources:BEA;BLS;Eurostat;FederalReserve;HaverAnalytics;WorldBank;TheEconomist

*Advanceestimate.Foodincludestobacco †Personal-consumptionexpendituresindex

‡Indexapplyinggraduallylowerweightstomoreextremepricemoves

100

75

50

25

0

2019 2020 2021 Feb 2022

Countrieswithinflationabovetarget,%

Emergingmarkets

(50countries)

Advancedeconomies

(1countries)

Euro

area*

United

States

1086420

Contribution to annual inflation rate

March 2022, percentage points

FoodEnergy Goods Services

125

120

115

110

105

100

2012 2220181614

UnitedStates,personal-consumption

expendituresprices,January2012=100

6

4

2

0

2017 2221201918

United States, measures of inflation†

% increase on a year earlier

Core

Trimmedmean(DallasFed)

The Economist’s “Uluru” index‡

2% growth since

target revised

Emergingeconomies

Default settings

T

he economic fallout from Russia’s in­

vasion  of  Ukraine  now  includes  a

sovereign  default.  On  April  12th  Sri  Lanka

said  that  it  would  suspend  payments  on

the  $35bn  its  government  owes  foreign

creditors. Surging food and energy prices,

the  result  of  wartime  disruption  to  com­

modity markets, have dealt a heavy blow to

an economy that was already mismanaged,

and  brought  even  erstwhile  government

supporters  onto  the  streets  in  protest.  Sri

Lanka may not be the only country to run

aground in the hazardous conditions pre­

vailing in the global economy.

Rising  inflation  and  higher  interest

rates  are  painful  everywhere,  but  the

stakes  are  particularly  high  in  poor  and

middle­income  countries.  Food  prices,

which are up by nearly 20% this year, make

up  a  greater  share  of  consumer  spending.

Inflationis more likely to spiral out of con­

trol.  And  policymakers  must  also  worry

about  capital  flight  and  falling  exchange­

rates when the Federal Reserve raises inter­

est rates—as it will over the next year.

As  investors  have  priced  in  such  tight­

ening,  the  yields  on  ten­year  Treasuries

have  risen  by  1.2  percentage  points  in  the

past six months. That is roughly the same

increase  as  during  the  “taper  tantrum”  of

2013,  when  emerging  markets  suffered

capital  flight  because  of  a  hawkish  Fed.

There  is  no  sign  of  a  repeat  retrenchment

on  that  scale,  in  part  because  many  mid­

dle­income  countries  now  have  stronger

balance­sheets,  and  also  because  many

emerging­market central banks have been

raising interest rates to get ahead of the in­

flation  problem.  (Brazil’s  central  bank  has

increased  rates  by  nearly  ten  percentage

points in little more than a year.) But inves­

tors have pulled some money out of emerg­

ing  markets,  and  the  Fed  may  yet  have  to

raise rates further still. 

Often higher rates in the rich world are

associated with a stronger world economy,

which  boosts  exports  for  emerging  mar­

kets. This time, however, America is over­

heating,  and  may  face  a  recession  as  it

slams  the  monetary  brakes.  Europe  is  be­

ing squeezed by expensive energy. Though

countries that pump oil or grow soyabeans

will  benefit  from  higher  commodity  pric­

es, they must still fight inflation and cope

with  tighter  financial  conditions.  Com­

modity  importers  like  Sri  Lanka  face  the

sort  of  pressure  that  can  unseat  govern­

ments as well as disrupt the economy (see

Sri Lanka’s sovereign default may be

the first of many