22 The Economist July 10th 2021
BriefingInflation
Boom and doom?
Prices are rising much faster than expected across the world’s economies.
Will it last?I
n january aninhabitant of a midwest
ern city—Cleveland, say—could buy a
threeyearold Toyota Camry for about
$18,000 and fill up its 60 litre petrol tank
for about $28. By May, the car would have
cost them 22% more and the 16 gallons of
gas 27% more. As the American economy
has risen from its pandemic slumber, the
prices of durable goods and commodities
have soared.
Not long ago economists tended to the
view that the covid19 pandemic would
lead to a prolonged slump in the rich
world. That view has not worn well. In Feb
ruary America’s Congressional Budget Of
fice predicted that growth in America in2021 would be 3.7%. On July 1st it doubled
that forecast to 7.4%. Since May the Bank of
England has revised up its estimate of Brit
ish gdpin just the second quarter of the
year by 1.5 percentage points.
With unexpected growth has come an
unexpected spurt of inflation. A certain
amount was baked in. The fact that pric
es—and in particular commodity prices—
fell during the spring of 2020 meant that
what are known as “base effects” would
drive headline inflation up this summer:
even if prices had been stable from March
to June this year, the fall over the same
months last year would see the yearon
year difference increase. But core prices—which exclude energy and food—were ex
pected to stay pretty stable.
In February the median economic fore
caster thought America’s core consumer
prices would rise just 1.9% over 2021. That
increase is already in the rearview mirror.
In the three months to May core inflation
reached 8.3% on an annualised basis, the
highest rate since the early 1980s. In June
the Institute for Supply Management’s in
dex of changes in the prices paid by Amer
ican manufacturers registered its highest
reading since 1979, a year in which con
sumer prices rose by 13.3%.
Inflation in other rich countries has
been more modest (see chart 1 on next
page). But it has still exceeded expecta
tions (see chart 2 on next page). In the euro
area headline inflation yearoveryear has
risen from 0.9% to 1.9% since May, touch
ing the European Central Bank’s target of
“below, but close to 2%”. Much of this is
due to base effects; core consumer prices
actually fell between February and May, as
they did in Japan. Britain is—as in many
things—an intermediate case. Headline in
flation is roughly on target but core con
sumer prices have accelerated. This has
caused some alarm. When leaving his job
on June 30th Andy Haldane, the Bank of
England’s chief economist, warned that
British inflation, currently 2.1%, would be
closer to 4% than 3% by the end of the year.
This is not just an issue for rich coun
tries. A measure of aggregate inflation in
emerging markets produced by Capital
Economics, a consultancy, rose from 3.9%
in April to 4.5% in May. Rising inflation
has set off a cycle of monetary tightening.
Since the start of June central banks in Bra
zil, Hungary, Mexico and Russia have
raised rates.
A sustained rebound in inflation would
be bad news for two reasons. First, infla
tion hurts. Lifesatisfaction surveys car
ried out in the 1970s and 1980s found a one
percentagepoint rise in inflation reduced
average happiness about as much as a 0.6
percentagepoint rise in the unemploy
ment rate. If it catches workers by surprise
it erodes their wages, hurting the lowest
paid the most; if it catches central banks by
surprise they may have to slow the econ
omy, or even engineer a recession, to put
the beast back in its cage.
Second, inflation has the potential to
upend asset markets. The skyhigh prices
of stocks, bonds, houses and even crypto
currency rests on the assumption that in
terest rates will stay low for a long time.
That assumption makes sense only if cen
tral banks do not feel forced to raise them
to fight inflation. If prices rise too persis
tently, the financial edifice that has been
built on years of low inflation could lose its
foundations.
The factors pushing inflation higher are