Why is inflation (even) a bigger problem in the US than it is in other rich countries

In the past year, companies around the world have started raising prices at a rate we haven’t seen in decades. Among the major economies, one of the hardest hit was the United States.

Prices rose at an annual rate of 4.7% last year, faster than any other country in the Group of Seven (G7) of more advanced economies, according to the Organization for Economic Co-operation and Development (OECD). In the UK, for example, inflation was only 2.5%.

Last month, Inflation rate in the US is 8.6%one of the highest rates in the world.

Many of the factors that led to inflation last year were not unique to the United States, such as supply disruptions from the Covid pandemic, rising food prices from crop damage from severe storms and droughts.

Why did the United States perform worse? In two words: high demand.

This increase in demand was driven by 5000 dollars trillions Approved by the US government to protect homes and businesses from the economic impact of the pandemic.

government spending

By supporting family funding, the aid, which included direct checks on families, helped people keep shopping.

There has been an increase in the demand for goods such as furniture, cars and electronics, and the reason is that consumers have redirected the money they might have been spending on restaurants and travel.

As the unusually high demand faced supply problems caused by the epidemic, companies raised prices.

BBC

A recent study by the Federal Reserve Bank of San Francisco concluded that pandemic relief packages likely contributed to a 3 percentage point increase in inflation through the end of 2021, a factor that largely explains why US inflation has outpaced US inflation in other countries in the scientist. .

Oscar Gorda, the bank’s senior policy adviser and one of the people who worked on the study, cautioned against focusing too much on specific percentages, but said the big picture was clear.

These programs () It was a huge injection of liquidity into the pockets of consumers at a time when the industry may not have been ready to respond to increased demandThat aid has translated into “a huge stimulus for what I would call demand-driven inflation,” Jorda said in an interview in May.

Slow response from the Federal Reserve

The risk that aid packages would lead to inflation was raised before they were passed, most notably by Harvard economist Larry Summers, a longtime Democratic Party adviser, as well as by some Republicans.

But other experts, including the head of the Federal Reserve or the US central bank, have argued that the price increases will be “transient” and will disappear as problems in supply chains related to the virus recede.

The Federal Reserve, which launched its own stimulus policies at the start of the pandemic, Slow to respond to price hikesEven as US inflation expectations start to shift, economist Ricardo Reis, a professor at the London School of Economics, says.

that italso(The change in expectations) It’s what turned transient into an ongoing state and once again the Fed has been slow to respond to thatReese noted.

The Federal Reserve on Wednesday announced the largest interest rate increase in nearly 30 years as part of its strategy to stem the increase in inflation.

With US households shielded by stimulus controls, last year’s price hike was not widely felt as a cost-of-living crunch, even though wages have not kept pace with inflation.

But with consumers exhaustedrune their savingsAnd the panorama she was ChangeWhich created a serious political problem for the American president Joe Bidenwhich Republicans blame for the price hike.

Joe Biden, President of the United States, at a press conference

Reuters

Joe Biden’s acceptance ratings have plummeted as concern about price gouging mounts.

For his part, Biden blamed the war in Ukraine, which is affecting oil supplies and exports of essential products such as wheat, driving up prices and affecting consumers around the world.

In the eurozone, prices rose at an annual rate of 8.1% in May, led by countries close to Russia that rely on oil and gas, such as Estonia, where prices rose 20.1%.

In the UK, which also relies heavily on food and energy imports, inflation hit 7.8% in April (just behind the US among more advanced economies) after capping energy bills, according to the Organization for Economic Co-operation and Development.

The Consumer Price Index compiled by the British government, which excludes housing costs, which is included in the OECD figures, showed, faster rise: 9%.

Even Japan, which has struggled to keep inflation rates above zero, saw a 2.5% price increase in April.

OECD forecasts inflation It peaked this year, averaging 5.5% among the most advanced economies and 8.5% in the 38 OECD countries, before declining in 2023..

Professor Reese said he was encouraged by the steps taken by the Federal Reserve, the Bank of England and other institutions to tackle the problem, including high interest rates.

By making borrowing more expensive, these measures help cool demand from households and businesses, and ease price pressures.

“I hope, though a bit uncertain, that this will happen without causing a recession,” Reese said.

The expert added that a return to the typical 2% inflation target is unlikely.

A woman and a salesman at a car showroom

Getty Images

Car prices, a major factor in inflation calculations, have risen last year.

suspicion

In the short term, higher interest rates increase economic uncertainty, particularly in smaller countries, which are vulnerable to sudden changes in cash flows and exchange rate fluctuations.

Even in major economies, policy makers are looking for ways to mitigate the impact of inflation on families affected by the skyrocketing cost of living.

The UK government recently announced a measure to combat rising energy bills: a £15 billion ($18 billion) aid package funded by a one-time tax on oil and gas companies.

Some European countries such as Spain and Portugal, Maximum gas prices have been seta type of response generally discouraged by economists, where caps tend to keep demand high by supporting consumption.

In the United States, Biden released unprecedented amounts of oil from national reserves in an effort to lower the price of gasoline, which, along with food, is the other most pressing “pain” point for consumers.

But as the war in Ukraine continues to expose supply problems, The power of politicians and central banks stayed LimitedAnalysts point out.

“In the long run, they can do a lot of things in terms of investing in different energy conversion policies and things like that,” Oscar Gorda says. “But in the short term there is not much that can be done.”


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