L.AST summer, Amid growing fears about inflation in America, White House economic advisers wrote a blog post where they examined the historical parallel. Although the press was full of oil shocks in the 1970s, they wrote that there was a near-relative displacement after World War II, when supply shortages approached paint-up demand. That was a plausible argument. But last month’s rise in commodity prices in the wake of Russia’s aggression in Ukraine raises an uncomfortable question: is the world economy now seeing a 1970-style price push on top of the supply crisis of the late 1940s? ?
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To be sure, no serious economist expects inflation in the rich world to reach double digits in those episodes. On March 16 the Federal Reserve raised interest rates for the first time since 2018, beginning a tough cycle that it hopes will continue well into next year. Moreover, the retreat in the oil market in recent days may provide relief.
Nevertheless, the rise in prices of everything from wheat to nickel threatens to drive up inflation. And a rolling lockdown in some parts of China could increase pressure on the global supply chain. Consumer-inflation in the U.S. already stood at a 40-year high in February, at 7.9% a year; The euro rate has already exceeded 5%.
Investors are still far from convincing that central bankers are at the top of the problem. The most interesting evidence is the anticipation of inflation that can be found in the fixed income market of America. ICE, A financial institution distills a number of different numbers, including inflation-protected bonds and interest rate swaps, on short-term and long-term indicators to measure expectations. Towards the end of January, the expected inflation rate for the following year was 3.5%. On March 15, it stood at 5.4%. The trend is slightly steeper, if the euro area looks similar to expectations. The one-year inflation swap rate rose to 5.9% on March 8 (see Chart 2).
Markets are inherently volatile, so inflation forecasts from bond yields should be taken with a pinch of salt. However, the change in price is consistent with what economists are predicting. Last week, the Bank of America raised its inflation forecast for most parts of the world. In the US, it now expects inflation to average 7% by 2022, up from the forecast of 6.3%. The eurozone is set to see even bigger growth, with average inflation at 6% this year, up from 4.4% in the previous forecast. The challenge is even greater for Europe due to its high dependence on Russia, which supplies about 45% of its gas imports.
To indicate how widespread the pressures could be, economists are even raising their inflation forecasts for Japan, where inflation has long been a major threat. March 7th S.AndP, A rating agency says Japan’s inflation will average 2% this year, more than double the previous forecast. So far, forecasters have been expecting a relatively moderate increase in overall inflation in emerging markets. But rising food costs will be particularly detrimental to their poorer citizens.
This prediction raises two related questions. The first is whether today’s rise in commodity prices will go through high inflation in the long run. In fact, there are reasons for cautious optimism. A large portion of the research shows that the pass-through of non-energy inflation from higher oil prices is quite limited. Goldman Sachs, a bank, for example, calculates that a 10% increase in crude oil prices causes a jump of about three-tenths of a percentage point of headline inflation in the United States, but only a three-percent increase. One percentage point of core inflation (excluding food and energy prices). This helps explain why market expectations of long-term price trends are even lower: pricing for five years from now is close to the Fed’s target of keeping inflation at an average of 2%.
Follow-up is what central bankers choose to do with commodity prices. The wisdom gained over the past few decades is that policymakers should avoid excessive austerity in the face of oil shocks. Indeed, rising electricity prices could act as a drag on costs, a particular concern for Europe.
But real interest rates are deeply negative in both the US and Europe, and central banks still have a long way to go to keep inflation in check, regardless of commodity prices. On March 10, the European Central Bank surprised the market by announcing that it would halt its bond-buying even faster. And according to the Fed’s estimates, its quarterly-point rate increase could be the first of seven this year. Central banks are currently embroiled in their pre-war plans. 3
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Read more in our recent coverage of the Ukraine crisis
This article was published in the print edition of the section on finance and economics under the heading “A Russian phenomenon”.