How inflation and interest rates differ around the world

How inflation and interest rates differ around the world

From Melbourne to Manchester to Miami, people are grappling with the burden of steep increases in the prices of the things they buy every day.

The worst rise in inflation that many advanced economies have seen in decades underscored the global forces driving up prices, namely the disruptions set in motion by the coronavirus pandemic.

This is a huge risk for policymakers around the world who are facing similar problems. To try to get inflation under control, central bankers have sharply increased interest rates, trying to slow down their economies in the hope of falling prices.

If they fail to bring inflation under control, it could result in a period of price volatility. Higher and less predictable inflation will affect households and businesses and make it difficult to plan for the future.

But if economic policy makers react too aggressively – and all at once – it could affect global economic growth to a painful extent. This could increase the risk of a great recession that would shut down businesses and put people out of work. Given the potential cost, policy makers do not want to overdo it, causing their economies to do more damage than necessary to reduce inflation.

Many central banks are considering those trade-offs in a similar way: They are focusing on fighting extremely high inflation. Officials fear that if they let inflation persist for too long, it could get stronger and prove even more painful to deal with.

Leaders of major central banks in North America, Europe and elsewhere have said recently that they expect to raise rates as inflation eases but remains well above their typical target rates – which is often 2 percent. Occurs around

US Federal Reserve officials have raised their policy rate from near zero to slightly above 5 percent in March 2022, and they anticipate raising it twice more in 2023 to slightly above 5.5 percent. Policymakers at the European Central Bank, which sets policy for the 20 countries that use the euro, are also expected to continue raising rates, reaching their highest level since 2001. The Bank of England recently surprised investors by raising rates more than expected. 13th consecutive hike.

Inflation in the United States has risen substantially in 2021 but has eased more sharply than in many parts of Europe. This is partly because the effects of Russia’s invasion of Ukraine have had a greater impact on Europe, which has sharply increased food and energy prices.

But even removing those volatile prices, so-called core inflation appears stubborn in many countries. It underscores a common problem facing policymakers: slow-rising prices for services are rising much faster than they were before the pandemic.

Prices of labor-intensive services such as medical care and education track wage gains and the strength of the overall economy. In essence, they are the kinds of price increases that central banks can do something about by raising rates to slow borrowing, curb spending, and ultimately cool the economy.

At a recent gathering of central bankers, Fed Chairman Jerome H. Powell said that for inflation in the service sector such as hotels, restaurants and banks, “we are not seeing much progress yet.”

Chart Source: FactSet (Policy Rates); Organization for Economic Co-operation and Development (inflation rate).

Map includes OECD members and selected major economies. Line charts show year-over-year changes in the latest central bank policy target rates and the consumer price index compiled by the OECD through May. For Australia, the change in consumer prices is for the first quarter of the year.

ashe nelson Contributed reporting.

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