The lags between tighter monetary policy and lower inflation are not well understood. Central banks may have to cause more pain than they currently anticipate
Save time by listening to our audio articles as you multitaskBut take a step back, and the outlook has in fact darkened in recent weeks. The global economy is slowing, perhaps into a recession, as central banks ramp up interest rates to battle a once-in-a-generation surge in prices . Even with one month of better-than-expected data for America, there is scant evidence thatFor most of this year people have worried about a downturn. In June Google searches for “recession” neared a record high.
The “Sahm rule” reveals another important truth: that different countries are moving at very different speeds. Aside from America, a number of places, including Australia and Spain, are still growing at a decent rate. Yet others are in trouble. Sweden, where high interest rates are hurting a particularly frothy housing market, is losing steam fast. Britain is now almost certainly in recession. In Germany sky-high energy prices are forcing industrial shutdowns.
In some countries lower energy and food prices are helping to drag down the headline rate of inflation. America’s recent figures for October were better than economists expected. In general, though, prices are not heading in the direction that central bankers would like. Inflation “surprises” across the rich world, when reported data come in higher than forecast, are still common . According to figures released on November 16th, inflation in Britain was 11.
This is where the second dimension—wages—comes in. Pay is a guide to the future path of inflation: when companies’ labour costs rise, they tend to pass them on to customers in the form of higher prices. Inflation optimists point to data from America, where there is some evidence of a pay slowdown, albeit from increases of 6% or more year on year. Growth in Britain also seems to have peaked at a high-but-no-longer-rising rate.
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