The Economist Magazine 29th April 2022
Central banks are supposed to inspire confidence in the economy by keeping inflation low and stable. America’s Federal Reserve has suffered a hairraising loss of control. In March consumer prices were 8.5% higher than a year earlier, the fastest annual rise since 1981. In Washington inflationwatching is usually the preserve of wonks in shabby offices. Now nearly a fifth of Americans say inflation is the country’s most important problem; President Joe Biden has released oil from strategic reserves to try to curb petrol prices; and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.
It is the Fed, however, that had the tools to stop inflation and failed to use them in time. The result is the worst overheating in a big and rich economy in the 30year era of inflationtargeting central banks. The good news is that inflation may have peaked at last. But the Fed’s 2% target will remain a long way off—forcing agonising choices on the central bank. Apologists for America’s policymakers point to annual price rises of 7.5% in the euro area and 7% in Britain as evidence of a global problem, driven by the soaring price of commodities, especially since Russia’s invasion of Ukraine. Nearly threequarters of the euro zone’s inflation is attributable to rocketing energy and food prices.
America, though, benefits from abundant shale gas, and its higher incomes mean that staples have a smaller effect on average prices. Strip out energy and food and the euro zone’s inflation is 3%—but America’s is 6.5%. Also, America’s labour market, unlike Europe’s, is clearly overheating, with wages growing at an average pace of nearly 6%. Recent falls in the prices of oil, used cars and shipping probably mean that inflation will fall in the coming months. But it will stay far too high, given the underlying upward pressure on prices.
The Economist Magazine 29th April 2022
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