The Two Inflation Crises – The New York Times

Political and economic crises usually have multiple causes. But many are currently motivated by one main factor: the rising cost of living.

In Britain, Prime Minister Liz Truss is facing calls to step down after just six weeks in office over a now scrapped tax cut plan that experts say would worsen inflation, if not wreak economic havoc . Europe is preparing for a spike in energy prices this winter. In the United States, the Federal Reserve is considering more aggressive measures to bring down price increases, but its measures could also cause a recession, as The Times reported yesterday.

This graph by my colleague Ashley Wu shows how quickly prices have risen in many advanced democracies around the world. Officials generally aim to keep the inflation rate around 2%, which is sufficient to maintain economic growth while preserving price stability. Many countries are at least four times above this rate:

So what happened? It helps to think of inflation as two related crises instead of one. In the first, the global disruptions caused by the pandemic and Russia’s invasion of Ukraine caused inflation to spike around the world. In the second case, some countries, especially the United States, also made inflation worse by domestic policy decisions. In today’s newsletter, I will explain both.

From 2020 to early 2022, Covid largely explained the trends on the chart. The pandemic and its fallout have created a shortage of supply (shuttered factories and choppy supply chains) and an increase in demand (for purchases like household furniture and airline tickets). This imbalance has led to price increases.

The chart trends show a change towards the beginning of this year. From last year through early 2022, prices in the United States rose faster than in other countries. But the EU and Britain are now ahead, data released today show. (The outlier is Japan, which has faced a stagnant economy and deflation for decades.)

Europe began to overtake the United States when the war in Ukraine created its own disruptions. Russia’s invasion crippled Ukraine – one of the world’s breadbaskets and a major grain exporter – and raised food prices. And Western sanctions in response to the war cut Europe off from Russian oil and gas, on which the continent was heavily dependent. Thus, world energy prices have also increased.

As this second chart from Ashley shows, Europe was the hardest hit. The war affected energy costs in other parts of the world, but countries less dependent on Russian oil and gas adapted more quickly:

Europe’s challenge now is to find alternative energy sources. Building the infrastructure, after dedicating pipelines and terminals to Russian oil and gas, will take time.

Even countries with larger buffers against the supply shock are taking steps to deal with energy prices. The Department of Energy plans to release an additional 15 million barrels of oil from strategic reserves.

Government responses to global crises have also influenced inflation, sometimes making it worse than it otherwise would have been.

The initial instinct of policymakers during the pandemic was economic preservation. To prevent Covid from triggering a deep recession, they adopted relief measures. In some cases, they may have gone too far: the goal of stimulus packages is to increase spending and demand, keeping the economy afloat. But if supply cannot keep up with new demand, prices will rise.

Once they did, central banks were also slow to respond – thinking inflation would come down as the impact of global disasters like the pandemic faded. Inflation therefore rose unchecked.

The United States suffered from both problems. America spent the most of any country in the world on economic aid, which likely led to excess demand and higher inflation. And for much of 2021, the Federal Reserve viewed rising prices as a temporary phenomenon; he did not acknowledge that inflation persisted until the end of last year.

This combination of excessive stimulus and central bank inaction helps explain why the United States had the highest inflation rate among its peers until Russia invaded Ukraine.

If it weren’t for the war, the United States might still be worse off than the rest. America still has a higher core inflation rate, which excludes food and energy prices, than many of its peers, indicating it has deeper issues than world events. which mainly increase food and energy costs. The labor market in particular remains hot, with an unusually high number of job vacancies for each unemployed person. These are the problems the Fed is trying to solve without causing a deep recession (as I have explained in this newsletter).

Simply put: inflation is the big problem. But in Europe, the causes and solutions are supply-side. And in the United States, they are more on demand.


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If you are traveling for vacation, buy your plane ticket as soon as possible. “The best time to book these Thanksgiving and Christmas flights was June and July,” says Scott Keyes, founder of Scott’s Cheap Flights. “And the second best is basically now.”

That’s one of the tips in The Times’ new guide to holiday travel. Domestic travel will be especially expensive this year — it costs more to book Thanksgiving flights to Cedar Rapids, Iowa, than to fly to Lisbon around the same time. But there are ways to save money. The guide includes some of the cheapest days to fly, many of which fall on Mondays.