"In polls leading up to Tuesday's midterm election, voters regularly cited inflation as their top concern, and Republicansflooded the airwavestying it toPresident Biden's policies. Republicans were favored to take control of the House of Representatives, although results were still unclear Wednesday.
Mr. Biden wasn't on the ballot in Australia in May, but the cost of living was as voters tossed out the ruling center-right government. Inflation and energy costs were also at work when French President Emmanuel Macron lost his parliamentary majority in June, Italy's technocratic government collapsed in July and Sweden's left-of-center governing coalition lost to a right-wing coalition in September.
This should come as little surprise; throughout history inflation has been socially corrosive and politically destabilizing.
Americans naturally look to American explanations for inflation. Republicans and some economists blame President Biden's $1.9 trillion stimulus in early 2021 for overheating the economy.
Historically, though, inflation trends have been synchronized across the Western world: it rose sharply in the 1970s in the wake of several commodity price shocks, fell in the early 1980s, and was quiescent to the point of being worrisomely low in the decade before the pandemic.
The latest cycle has been no different. The U.S. saw inflation come back earlier and faster as economies reopened, but is no longer an outlier. Recent sanctions on Russia has raised energy costs globally, especially in the eurozone. But even excluding volatile categories such as energy and food, "core" inflation has climbed to the 6% to 7% range in Sweden, the U.K., Canada and Australia, comparable to the U.S. rate, according to CEIC Data, an economic data provider. In Germany and France, it's about 3 percentage points higher than before the pandemic.
The U.S. did export some of its inflation; stimulus signed into law by both President Donald Trump and Mr. Biden fueled so much demand for internationally traded goods that the resulting supply shortages drove up prices in other countries. A recent Federal Reserve staff study estimates U.S. stimulus contributed 2.3 percentage points to Canada's inflation and 0.3 point to Britain's. As the Fed has raised interest rates this year, the dollar has climbed sharply, raising import costs for emerging markets in particular.
That still leaves plenty of inflation with no American connection. In numerous countries, the cost of shelter, which is almost entirely domestically driven, is rising rapidly. Most telling, labor markets, which are largely insulated from international developments, are universally tight. Unemployment is as low or lower in most Western economies as on the eve of the pandemic, while unfilled job vacancies are higher. This has recently begun to find its way into wages. In Canada, where unemployment is hovering near a four-decade low and vacancies have doubled since 2019, annual pay growth accelerated to 5.6% in October -- faster than in the U.S.
Inflation rose worldwide in part because policy makers in so many countries followed the same playbook: locking down their economies early in the pandemic, which distorted spending and work patterns. Elected leaders and central bankers from different countries also absorb the same intellectual currents. It is why inflation rose and fell at the same time in the 1970s and 1980s. Because the global financial crisis led to a decade of weak growth and too-low inflation, they saw little risk from implementing generous fiscal relief, slashing interest rates and buying bonds.
Today, even their postmortems sound similar. "It is understandable that some people are questioning whether or not too much support was provided," Reserve Bank of Australia Gov. Philip Lowe said in September. "In those dark days of the pandemic, the [bank] judged that the bigger policy mistake would have been to do too little, rather than too much." Treasury Secretary Janet Yellen made much the same case for stimulus in early 2021.
Inflation also reflects common shocks to economies' productive capacity having little to do with fiscal or monetary policy. Underinvestment in both fossil fuels and renewable energy infrastructure exposed everyone to crippling supply interruptions. Covid-19 scrambled work and commuting patterns and continues to leave millions too sick to work. Britain's labor force is smaller now than in 2019, leading Bank of England Gov. Andrew Bailey to wonder in a July speech, "Have more people retired than was expected, has long-term illness risen permanently, and how many people may return to the labor force and over what time?"
The confluence of factors forcing inflation up around the world pose a challenge to any country trying to solve it. Central banks around the world are raising interest rates but can do little about energy markets, demographics or fiscal policies pushing in the other direction.
If Republicans take control of Congress, they may push President Biden to cut spending. Yet to reduce the inflation rate just 1 percentage point next year via spending cuts alone would require slashing annual discretionary outlays by nearly half, or $750 billion a year, the Penn Wharton Budget Model, a nonpartisan think tank, estimates. That's roughly equal to the entire defense budget.
Spending cuts on such a scale would be so politically unpopular as to be almost unfeasible. Nondiscretionary spending, such as on Social Security and Medicare, isn't subject to annual appropriations legislation and is thus even harder to cut -- and, despite Republican talk of changes, even more politically sacrosanct. Those political leaders who have reaped the electoral rewards of high inflation may find it no easier to solve than the people they replaced." [1]
1. U.S. News -- Capital Account: Inflation a Headache for Leaders Everywhere
Ip, Greg.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 10 Nov 2022: A.2.
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