World Bank expert: The return of global inflation

Think tank PS- On February 11, CARMEN M. Reinhart, chief economist of the World Bank Group, and Clemens Grafvon Luckner, economist of the World Bank, analyzed the return of global inflation.Notes that today, the surge in inflation is being felt not only in advanced economies (AE) but also in most emerging and developing economies.While the reasons vary from country to country, the task of fixing the problem will ultimately fall to the world’s leading central banks.Inflation has come back faster, surged more sharply, and proved more persistent and durable than major central banks initially thought possible.After initially making headlines in the United States, the issue has become central to policy discussions in many other advanced economies.Of the 34 countries classified as advanced economies in the IMF’s World Economic Outlook, 15 had inflation rates above 5% in the 12 months to December 2021.Such a sudden, common jump in high inflation has not been seen in more than 20 years.Nor is this surge in inflation confined to rich countries.Emerging market and developing economies (EMDEs) have been similarly hit, with 78 of 109 also facing annual inflation of more than 5 per cent.The share of emerging market and developing economies (71 percent) is roughly double that at the end of 2020.So inflation has become a global problem — or nearly so, though Asia has so far been spared.The main drivers of surging inflation are not uniform across countries, especially when comparing advanced economies with other economies.The “overheating” diagnosis prevalent in discussions in the United States does not apply to many EMDEs, where fiscal and monetary stimulus in response to the pandemic is limited, and economic recovery in 2021 lags well behind AE’s rebound.Moreover, the patterns of recession and recovery caused by the pandemic differ markedly among different national income groups.Here, recovery is defined as an economy returning to its 2019 per capita income level.About 41% of high-income AE reached this threshold by the end of 2021, compared with 28% in middle-income EMDEs and 23% in low-income countries.But the gap between developed and developing economies is even greater than this comparison suggests, as many EMDEs had already experienced declines in per capita income prior to the pandemic, while AEs were mostly at new highs.Although many EMDEs have lowered their estimates of potential output over the past two years, there is little sign that their inflationary pressures are being driven primarily by overheating following major policy stimulus.One common development of advanced and developing economies is that commodity prices rise as global demand increases.As of January 2022, oil prices were 77% higher than they were in December 2020.Another major issue affecting both developed and developing economies is the global supply chain, which continues to be heavily affected by the events of the past two years.Transport costs have shot up.Moreover, unlike the oil-based supply shocks of the 1970s, the supply shocks of COVID-19 are more diverse, opaque, and therefore more uncertain, as highlighted in the World Bank’s recent Global Economic Prospects.In EMDEs, the devaluation of the currency, due to reduced foreign capital inflows and sovereign credit rating downgrades, led to inflation in imported goods.And because EMDEs’ inflation expectations are less stable than AEs’s and more adaptable to currency movements, the pass-through from exchange rate to price tends to be faster and more pronounced.Another important factor is food price inflation.In 2021, 79% (86 out of 109 countries) of EMDEs saw 12-month food price increases of more than 5%.While emerging market countries were not immune to rising food prices, only 27 per cent experienced price increases of more than 5 per cent.To make matters worse, rising food prices also typically disproportionately affect low-income countries and low-income families everywhere, making them a regressive tax.In emerging market economies, food accounts for a much larger share of the average household consumption basket, meaning that inflation in these economies could prove sustainable.Higher energy prices today will translate directly into higher food prices tomorrow, possibly through higher fertiliser and transport costs.Although most emerging market economies no longer have fixed exchange rates, as they did in the inflationary 1970s, the scope for “truly independent” monetary policy in small open economies remains limited, despite floating exchange rates.The risk that they import inflation from global financial centres is not some hangover from the past.In fact, the most striking feature of today’s inflation is its ubiquity.In the absence of global policy options to address supply chain disruptions, the task of tackling inflation has been left to central banks.While the United States is poised for modest tightening in 2022, it is unlikely to be enough to contain price growth.As Kenneth Rogoff and I documented in a 2013 paper, inflation persisted in the 1970s largely because the Federal Reserve tended to do too little, too late.To be sure, a more timely and forceful policy response from major central banks is not good news for EMDEs in the short term.Most countries would experience higher financing costs and, for some, the likelihood of a debt crisis would increase significantly.However, the long-term costs of delaying action would be greater.Because the United States and other advanced economies failed to tackle inflation quickly in the 1970s, they eventually needed to adopt much harsher policies, which led to the second deepest postwar recession in the United States and also to debt crises in developing countries.As the saying goes, “Hit the nail on the head”.Meanwhile, the resurgence of inflation will continue to reinforce inequalities within and between countries.

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