The Economist: The world economic downturn has not stopped inflation

The world has suffered by slowing economic growth to control inflation, but according to The Economist’s analysis, inflation is still very “stubborn”.

From the beginning of October, investors received some good news. European stocks rose as optimists said in the immediate future the country would avoid an energy crisis. Chinese stocks rose on news that the country may adjust its anti-epidemic policy and loosen restrictions on real estate. On November 10, when there was news that US inflation was slightly lower than forecast, the Nasdaq rose 7% as investors expected the Fed to raise rates less.

However, The Economist said that the global economic outlook has in fact turned murky in recent weeks, as central banks raised interest rates to prevent a rare wave of price increases. Even in the US, there is little evidence that inflation has been beaten. In many countries in the world, it is still expanding.

Almost of this year, the world has been worried about a recession. In June, searches for the keyword “recession” on Google hit a record high. But in fact, productivity in the average rich countries grew by about 1.3% from the end of 2021 to the third quarter of this year, that growth is not spectacular, but not bad.

In the first nine months of the year, the average unemployment rate in the OECD – the group that accounts for about 60% of global GDP – reduced by almost a percentage point. The unemployment rate in the eurozone is at an all-time lowest. Consumer spending is strong, with hotels, planes and restaurants packed around the world.

Until now the higher borrowing costs begin to pose a challenge. In many countries like Canada and New Zealand, home prices are falling down as buyers face increasingly expensive loans. Companies are also curbing spending expenses.

In latest monetary policy report, the Central Bank of England noted that more expensive financing is making investors more cautious. The Fed evaluates investment of corporate “has begun to respond to tightening financial conditions”.

A consumer chooses fruit in Nice, France on June 7. Photo: Reuters

Economic conditions are starting to deteriorate in real time when looking at the “Current Activity Index” – Goldman Sachs’ monthly gauge of economic health. Last month, for the first time since 2020, growth in rich countries contracted. Similarly, the Purchasing Managers Investigation (PMI) recorded a decrease for the first time since June 2020.

Optimists look at the strength factor of the labor market. Despite a slight slowdown, the US added more than 250,000 jobs in October. Elsewhere, however, signs of weakness are emerging.

Studying the rule has been going on since 1950, Economist Claudia Sahm, Manager of the Macroeconomic Research Initiative of the Jain Family Institute (USA) concluded that a recession is near when the unemployment rate in the past three months increased by at least 0.5 percentage points from the lowest level in the previous year.

Currently eight out of 31 rich countries have this sign, including Denmark and Netherlands. This is not a high rate compared with the beginning of the financial crisis 2007-2009, but it does signal a serious slowdown is happening.

In general, different countries step into recession in different speed. Besides US, some countries like Australia and Spain still have good growth. But Sweden, where high interest rates hurt the housing market, is losing momentum rapidly. Britain will certainly fall into a recession. In Germany, high energy prices forced industries to close.

Both theory and economic data over the past seven decades show that falling GDP is related to a slower rate of price growth. But the lag between tighter monetary policy and lower inflation still not well-understood. Central banks may caused inflict more pain than they currently predict.

In some countries, lower food and energy prices are helping to drag down overall inflation. The US October data was better than economists expected. Overall, however, prices are not moving in the direction central banks want. Inflation remains a surprise, as the data reported was higher than expected in most of the developed world.

Almost everywhere, “core” inflation, which is a good reflection of reality, is rising. In three dimensions – width, wages and expectations – inflation in rich countries is becoming more severe, not less.

The first is the width. When inflation started to increase last year, it was limited to a small number of goods and services. In the US, it’s used cars. In Japan it’s food. In Europe is energy. This creates artificial comfort, with many experts say that once prices stop rising in some of these components, overall inflation will fall.

But in reality, inflation was contagious. The Economist analyzed the consumption baskets of 36 rich countries. In June 2021, 60% of the prices in the basket have increased by more than 4% compared to the same period in 2020. The current figure is 67%. Even in Japan, where inflation is low, the price of a third of the cart is increasing by more than 4%. This expansion is partly due to the unusually strong USD, which increases import inflation. However, much of it still comes from domestic reasons.

Source: GSO. Graphics Vietnam Financial Times

This is where the second aspect – wages – comes in. Wage trends indicate the future path of inflation. As labor costs increase, companies pass them on to customers in the form of higher prices. Inflation optimists point to data from the US, where wage growth slowed. Wage growth in the UK also appears to have peaked at a high rate but is no longer rising.

However, other places are not like that. Research from the job sites Pawel Adrjan of Indeed and Reamonn Lydon of the Central Bank of Ireland shows that nominal wages in eurozone job postings are growing by more than 5% and continuing to accelerate.

JPMorgan thinks France’s wage inflation will rise further. In Germany, Ig Metall, a large union for metal and engineering workers, is looking to raise wages by up to 8%. In New Zealand, Norway and Sweden, wage growth is still higher.

The third aspect is expectations. The consulting firm Alternative Macro Signals analyzes millions of articles in multiple languages through a model to build the “News Inflation Pressures Index”. The index, which has proven to be a good predictor of official numbers, remains bullish.

Similarly, survey-based expectations measurements provide no evidence of weakening inflation. Figures compiled by the Cleveland Fed, Morning Consult, and Raphael Schoenle of Brandeis University assess the public’s inflation expectations in different wealthy nations.

An October survey by the Cleveland Fed, Morning Consult, and Brandeis University’s Raphael Schoenle, found that the public in rich countries expect prices to rise 5% next year. The Cleveland Fed survey says US companies expect inflation to be 7% next year, the highest since 2018.

Over the past year, few economists have fully understood inflation, including its causes and what makes it exist. Therefore, it is likely that they will also have difficulty predicting when inflation will cool. It is more likely that inflation will be “stubborn” even if the economy slows down. It leaves regulators with a grim choice: squeeze more into an already tough economy, or let prices skyrocket.