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Ultra-tightening policy is still difficult to control inflation

Ioctober us Check out the fate of Hikelandia. In these eight countries — Brazil, Chile, Hungary, New Zealand, Norway, Peru, Poland and South Korea — central banks turned a blind eye to inflation. They started raising rates before the Federal Reserve and, on average, raised rates more aggressively. However, we find little evidence that their determination was rewarded with lower inflation. Hikelandia’s experience raises questions about how quickly monetary policy can rein in prices. Fed policymakers have been watching closely.

The latest figures offer little reason for optimism. Hikelandia’s inflation problem is still worsening. “Core” inflation excludes volatile components such as energy and food and is therefore a better gauge of underlying stress. In December, that number hit a new high of almost 10% year-over-year (see chart). Higher borrowing costs haven’t crushed Hikelandia’s inflation, but they are crushing its economy. Output is shrinking at an annualized rate of around 1%, down from a 5% growth rate early last year.

In some parts of Hikelandia, central bankers have had better luck. Brazil’s core inflation is now markedly lower. South Korea is showing signs of improvement. Elsewhere, however, less progress has been made. In Chile, average wages are growing by about 10% a year, too fast at a time when productivity growth remains weak. In Hungary, prices soared. Annual core inflation rose to 25% in December from 19% in August. We estimate that more than one-fifth of the Hikelandia inflation basket saw prices increase by 15% or more year-on-year.

When will the price of Hikelandia come down? Recent data suggest that inflation is unlikely to go well beyond double digits. However, the longer high inflation persists, the more Hikelandia’s citizens will look forward to it. Just ask the Hungarians, many of whom are obsessed with the cost of living. They now Google “inflation” as much as they search for “Viktor Orban.”

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