For weeks, governments and policymakers across the world have been suggesting the recent spikes in consumer and energy prices are transitory and rising inflation will ease, once pandemic-related chain-supply disruptions and labor shortages are resolved and the global economy reboots.
But recent figures suggest inflation may persist for some time, prompting worries about an explosive cost-of-living crisis, which could roil the domestic politics of countries and disrupt the electoral plans of incumbent parties and their leaders.
Central bankers have been saying the price increases of goods, rent, food and energy are one-offs, the consequences of economies struggling to recover from the induced coma of COVID-19 lockdowns and pandemic restrictions. But new data on inflation from around the world have exceeded forecasts, and central bankers are now being criticized for failing to act to restrain surging prices.
Bank of England stands pat
Central banks are coming under mounting pressure to raise interest rates but are nervous about acting too hastily and reversing recovery by reducing stimulus measures. The Bank of England earlier this month decided not to raise interest rates despite its governor, Andrew Bailey, earlier saying bankers “will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations.”
Recent figures show inflation in Britain has now jumped to its highest level in nearly a decade, with the consumer price index climbing 4.2% in October from a year earlier. The Bank of England has an official inflation target of 2%. The bank’s decision not to raise its key rate, leaving it at 0.1%, confounded the financial markets and sent the pound plunging in value, and the inaction is still being criticized by many economic commentators.
They include Neil Wilson of Markets.com, who says the governor’s “credibility is at stake.”
Likewise, in the United States, the Federal Reserve is coming under fire over rising inflation. Earlier this week, Mohamed El-Erian, chief economic adviser at Allianz and an influential commentator, said he thought America’s central bank was losing credibility over its long-standing view that inflation is transitory.
“I think the Fed is losing credibility. I’ve argued that it is really important to re-establish a credible voice on inflation and this has massive institutional, political and social implications,” he said.
El-Erian told CNBC-TV the Federal Reserve’s inflation stance risked undermining President Joe Biden’s economic agenda, warning that policymakers should not forget that those on low incomes are the hardest hit by rising consumer prices.
In the US
The rapid increase in household living costs already is being felt by Americans.
According to a series of opinion polls conducted by the pollster YouGov for The Economist magazine, 46% of Americans said they believed the state of the economy was “getting worse,” with only 19% saying it was “getting better.”
In the U.S., the consumer price index rose 6.2% in the 12 months ending in October, the highest rate in three decades. Americans said rising wages were not keeping up with rapidly increasing prices. Fifty-six percent of the respondents to YouGov said they were having trouble affording fuel, 48% could not easily pay their rent or mortgages and 45% said they were struggling to feed their families.
Some member states of the European Union also are facing a cost-of-living crisis.
Romania reported in October an annual inflation rate of 6.5%, the highest increase in consumer prices among EU member states in southeast Europe, according to Eurostat, the EU’s statistical office. Eurozone inflation is running at 4.1%, more than double the European Central Bank’s target.
Increases seen as transitory
This week, European Central Bank President Christine Lagarde conceded that Eurozone inflation likely would remain elevated for longer than had been expected. She remained wedded to the idea that price increases were likely transitory, and she was still forecasting inflation would drop below the bank’s 2% target in the medium term.
“We still see inflation moderating in the next year, but it will take longer to decline than originally expected,” she told lawmakers at the European Parliament.
Some economists in Europe, however, question her optimism. They say the pandemic is far from over, pointing to a fourth wave prompting rising cases across much of the continent and the prospect of a return of economically damaging retractions. Germany has declared a state of emergency and Austria has announced a full lockdown to begin Monday, becoming the first European country to go back under a full lockdown and the first to make COVID-19 vaccination compulsory.
Germany’s coronavirus situation is so grave that a lockdown, including for the vaccinated, cannot be ruled out, German Health Minister Jens Spahn said Friday.
“We are in a national emergency,” he told a news conference.
The path back to normality is now again murky for Europe, and economists say the impact of a fourth wave of the coronavirus on household budgets is going to be significant — this at a time when the price of almost everything is going through the roof.