In which direction is inflation going? – BRINK – Conversations and insights into global affairs

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The latest economic data shows that inflation in the United States reached 8.5% in July. This is down from 9.1% in June. July retail sales figures were flat, which some analysts interpreted as a sign of hope. After removing food and fuel costs, prices rose 5.9% through July, matching the previous reading, according to the New York Times.

Another sign that inflation may be decelerating in the United States: Gasoline prices fell $1 a gallon, back to the same levels as in March, after peaking in June.

However, Federal Reserve Chairman Jerome Powell has signaled his willingness to inflict “a little pain” on households and businesses in order to keep pressure on inflation. His speech sent the Dow down 1,000 points and market analysts believe the Fed could raise interest rates by up to 0.75% at its next meeting later this month.

In the UK, inflation reached 10.1% in July, and the Bank of England predicts that it could reach over 13% in the last three months of this year and remain “very high” for a much of 2023. Goldman Sachs says it could climb as much as 20% in winter if energy prices keep climbing. However, the Bank of England expects inflation”to slow down next year and be close to 2% within about two years.”

The main drivers of inflation

According to the Bank of England, there are three main reasons for inflation in the UK. The most important is the rise in energy prices caused by the Russian invasion of Ukraine, which has caused the price of natural gas to double since May.

A second reason is COVID, which always causes supply chain disruptions and increased demand for consumer goods at the same time, driving up prices. The third is that in the UK there are more vacancies than there are people to fill them, as fewer people are looking for work as a result of the pandemic. “That means employers have to offer higher salaries to attract candidates. And the prices of many services have gone up.

Higher wages in the UK also appear create an inflationary spiral, with a shortage of workers causing higher wages, which drives up prices, which in turn fuels more demands for higher wages. In the rest of Europe, there has been more wage moderation so far, with most sectors in Germany, for example, agreeing to limit wage increases to a range between 3 and 4.5%.

China cuts interest rates

In most parts of the world, inflation still seems to be on the rise. In the euro zone, inflation reached a new record in August at 9.1%. German central bank chief predicts prices could reach 10% by the end of the year, mainly because of the Russian gas cut. Prices in Australia rose 6.1% last month, South Africa 7%, Russia 14% and Brazil 10%, although it was the lowest since December.

Turkey’s inflation rate is one of the highest, at around 80%. Even so, the Turkish president is calling for lower interest rates, saying that it is interest rate hikes that cause inflation, contrary to conventional economic thinking.

In China, the central bank cut interest rates, suggesting it is more concerned about slowing economic growth than inflation. China’s economy is being hit by prolonged COVID shutdowns and significant issues in the country’s property market. Some analysts even predict an annual growth rate of less than 3% in the country, which would be the lowest level for two decades.

Risk of stagflation

A hopeful piece in the puzzle has been a recent drop in food prices. Wheat, maize and palm oil have all returned to their price levels of six months ago, before the Ukrainian conflict. Ironically, the main driver for this appears to be a bumper wheat harvest in Russia, which has increased the amount of Russian grain exports. However, many developing countries will continue to suffer from high food prices as their currencies weaken against the strong dollar.

Source: The Economist; Data sources: FT, Refinitiv Datastream; S&P Global Commodities Outlook

There are fears that the global economy may be stuck in a stagflationary loop of long-term high inflation and weak economic growth.

IMF downgrades economic growth forecast in the United States to 2.3% this year and 1% next year. In China, the IMF’s estimate is down to 3.3% this year – the slowest in more than four decades, excluding the pandemic – and in the euro zone, the growth rate is revised down to 2.6 % this year and 1.2% in 2023, reflecting the fallout from the war in Ukraine and the tightening of monetary policy. The European Central Bank is expected to announce its next rate hike this week.

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