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It’s a bit unfair. In July 2021, when the rate-setting government in the United States and Europe averted the threat of entrenched inflation, Chile’s central bank recomposed itself. Worried that inflation would remain high and remain high, its lawmakers voted unanimously to raise rates from 0. 5% to 0. 75%. Then the bank has come and gone, beating investors’ expectations and raising the policy rate to 11. 25%. Perhaps no other central bank has pursued value stability with such dedication.
Has the star student been rewarded? In September, costs in Chile rose by as much as 14% year-on-year. The central bank’s preferred measure of core inflation accelerated to 11% year-on-year.
The example of Chile evokes a larger problem. Many experts say that if only the Federal Reserve, the European Central Bank and others had “moved forward” by raising rates last year, the world would not be suffering from today’s peak inflation. Early and aggressively, it casts doubt on this argument. Around the world, it is proving extremely difficult to push down prices.
The Economist compiled information on Chile and seven other countries where the central bank began an adjustment cycle at least a year ago, and did so after cutting interest rates to record lows at the start of the covid-19 pandemic. The organization includes Brazil, Hungary, New Zealand, Norway, South Korea, Peru and Poland. Although Russia qualified, we excluded it because its scenario is unique.
He calls the gang “Hikelandia. ” In the year to October 2022, Hikelandia’s median economy raised rates by about six percentage issues. If, as expected, the Federal Reserve raises rates by 0. 75 percentage issues on Nov. 2, America’s cumulative accumulation over the subsequent year will still not be anywhere near that large.
No wonder turning the currency screws has slowed down Hikelandia’s economy. The housing sector temporarily lost momentum as loan rates rose. Property costs are falling in New Zealand. indicator”, a real-time measure of economic strength. Using their data, we see that Hikeland’s economy is weakening relative to the world average. And there are worse things to come. Chile’s central bank expects GDP to contract next year.
Inflation, however, remains stubborn. Central banks focus on the “core” inflation rate, which excludes volatile parts such as energy and food, and largely reflects domestic inflationary pressures. March issues. Worse, the gap between headline core inflation and Hikeland’s reading appears to be widening, not narrowing.
Delve into Hikeland’s national statistics and the trfinishes are even more worrying. Wage expansion in Chile continues to accelerate. In September, South Korea’s inflation rate in the labour-intensive facilities sector was 4. 2% year-on-year, its highest point since the early 2000s. Over the past six months, inflation in Hungary’s facilities sector rose from 7. 2% to 11. 5%. Across the club, inflation is becoming more “scattered,” affecting a wider variety of goods and facilities. In September, the value of 89% of shares in Norway’s inflation basket rose more than 2% year-on-year, up from 53% six months earlier. In studies on Poland, published in late September, Goldman Sachs economists found evidence that “core inflation dynamics have returned to it. “
Hikelandia’s struggles pose 3 possibilities. The first is that lately it is unrealistic to expect inflation to fall. Research suggests there are long delays between tightening financial policy and falling inflation. It is also difficult to control inflation when almost all currencies depreciate against the dollar, making imports more expensive. All of this is possibly true. But having been caught off guard again and again by inflation, it would be brave to bet that Hikeland inflation will soon be close to the central bank’s targets, even if situations start to improve.
The choice of the moment is that policymakers, coupled with those in Hikelandia, have not been brave enough. Perhaps central banks have raised interest rates more aggressively. Market reforms in the 1970s.
Governments can also do more to help. After expanding spending when the pandemic hit, Hikelandia’s average budget deficit has declined, but remains giant at 3% of GDP. More tax increases or cuts in government spending would help lower demand. However, this strategy also carries risks. Implementing austerity measures in a cost-of-living crisis would be deeply unpopular. And Chile, which has yet to take the step and is expected to run a budget surplus this year, still sees little advantage in terms of lower inflation.
This leads to a third, and most worrisome, possibility. Perhaps inflation is harder to prevent than predicted a year ago. In a report released this summer, the Bank for International Settlements, a club of central banks, hinted at this. possibility. In a “low inflation regime,” the norm before the pandemic, no one paid much attention to prices, making sure they didn’t rise quickly. But in a “maximum inflation regime,” as in the 1970s, households and businesses begin to closely monitor inflation, ultimately leading to “behavioral adjustments that can entrench it. “
© 2022 The Economist Newspaper Limited. All rights reserved.
From The Economist, published license. Original content can be discovered on https://www. economist. com/finance-and-economics/2022/10/23/even-super-tight-policy-is-not-bringing-down-prices