The world’s major economies dealing with inflation
The world’s major central banks are trying to figure out how to deal with the increasing cost of living. Increasing interest rates now might hit post-pandemic recovery. Analysts expect inflation to become uncontrollable.
By many standards, the US economy boomed back from the pandemic collapse. Unemployment dropped to 4.7% at the beginning of October, from its high of 14.9% at the pandemic’s peak. The jobs market seems very active as record numbers of people decided to quit their jobs in the hope of finding new positions as wages rise. Stock markets keep reaching record new highs while people are spending more again.
However, inflation is visible. Increasing energy costs, supply shortages, and raised consumption have sent US inflation rising to an annual rate of 6.3%. It is a level not seen for more than 35 years. The Biden administration with Powell has said that these rises seem to be transitory. They also agree that the normalization of the situation will happen as the pandemic’s impact on the economy declines. However, prices continued to increase.
Fear left US consumers worried while the US consumer confidence jumped to a 10-year low this month.
The Fed’s primary tool for fighting inflation is increasing interest rates. The dilemma is apparent that raising rates very quickly might delay recovery if the price rises are transitory.
The Bank of England plans to raise interest rates when officials meet in December. Analysts expect it to become the first major central bank increasing interest rates.
Many City analysts believe that the rise in inflation to 4.3% (October) will push policymakers to raise the base rate. The raise will be from 0.1% to 0.25%.
The UK has suffered more than most from energy price rise and the supply chain crisis, with over 1/3 of its GDP dependent on trade. At the same time, it was one of the more open economies globally.
In the meantime, Brexit reduced the number of skilled workers entering the UK, which worsened the country’s situation.
Now policymakers began to worry about the situation as they think workers will demand higher salaries to pay for higher living costs resulting from a lack of skilled workers to fill vacancies. This situation might trigger a damaging price spiral for several years.
Experts and critics of the central bank question the idea of higher borrowing costs in decreasing energy prices fixed by global markets.
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