Last week Eurostat, the European Union’s statistical agency, released a revised estimate of the euro area’s February inflation rate. It wasn’t a happy report: Consumer prices were up 5.9 percent from a year earlier, more than most analysts had expected. And it’s going to get worse, as the effects of the Ukraine war weigh on food and energy prices.
Britain hasn’t yet released its February inflation number, but the Bank of England expects it to match the rate in the euro area.
Of course, U.S. inflation is even higher, with February consumer prices up 7.9 percent from a year earlier. These numbers aren’t exactly comparable, for technical reasons, but inflation in the U.S. does seem to be running around two percentage points higher than in Europe. I’ll come back to that difference and what might explain it. But surely the fact that inflation is up a lot in many countries, not just America, is worth noting.
After all, the entire Republican Party and a fair number of conservative Democrats insist that the recent surge in U.S. inflation was caused by President Biden’s big spending policies. Europe, however, had nothing comparable to Biden’s American Rescue Plan; last year the euro area’s structural budget deficit, a standard measure of fiscal stimulus, was only about a third as large, as a percentage of G.D.P., as America’s.
So why is inflation up in Europe?
Part of the answer is rising energy prices. Last week I noted that Kevin McCarthy, the Republican House minority leader, has declared that gasoline prices “are not Putin gas prices. They are President Biden gas prices.” Let me elaborate on the absurdity of that claim, using British data.
In late December 2020 gasoline in Britain cost 116 pence per liter — $5.94 a gallon. By mid-March that was up to $8.23 a gallon. Over the same period U.S. gas prices rose from $2.24 to $4.32. Taking Britain’s high gas taxes into account, the price increases were similar, even though Joe Biden is not, as far as I know, the British prime minister.
But it’s not just energy prices. U.S. inflation has been driven up in part by pervasive supply-chain problems, with a big shift of demand toward goods straining ports, shipping capacity and more; these same strains, which have lasted much longer than many of us expected, have afflicted Europe, too.
So what does high inflation in Europe tell us? First, that a large part — maybe two-thirds — of the acceleration in U.S. inflation reflects global forces rather than specifically American policies and developments. Second, because these global forces may abate if we finally emerge from this dark tunnel of pandemic and war, U.S. inflation may eventually decline substantially even without drastic changes in policy. (Notice how I avoided using the word “transitory”? Oh, wait.)
That said, inflation is running hotter on this side of the Atlantic. Why? One main factor, almost surely, is that the economy of the United States has recovered faster than that of Europe. In the fourth quarter of 2021 real gross domestic product in the U.S. was 3 percent larger than it had been before the pandemic, while the euro area had barely recovered its losses. And in case you’re wondering, you don’t need to discount those numbers for faster U.S. population growth; our working-age population has in fact stagnated since 2019, largely thanks to a collapse in immigration.
And U.S. economic growth has helped workers as well as G.D.P. Although hourly real wages have been eroded by inflation, total labor compensation is up 13.6 percent since the eve of the pandemic, compared with only 5.2 percent in Europe.
Now, excess inflation suggests that recent U.S. economic growth has been too much of a good thing. Our economy looks clearly overheated, which is why the Federal Reserve is right to have started raising interest rates and should keep doing it until inflation subsides.
But while overheating is a problem, we shouldn’t let it overshadow the good things that have happened. We recovered fast from the pandemic recession and seem to have avoided the long-term “scarring” effects that many feared. Most though not all of the inflation we’re experiencing reflects probably temporary global forces, and multiple indicators — consumer surveys, professional forecasters and financial markets — suggest that longer-term expectations of inflation remain “anchored,” that is, inflation isn’t getting entrenched in the economy.
There’s still the question of why Americans feel so lousy about the economy, or at least tell pollsters that they feel lousy (they’re spending as if they’re optimistic). We’re not unique in this respect: European consumer sentiment has also taken a hit in the face of inflation, although nothing like the plunge we’ve seen here. But that’s a topic I’ll return to another day.
For now, I’d just urge Americans to look at their economy in the European mirror. Recovering from the pandemic was always going to be tough, and Vladimir Putin has made it tougher. But under the circumstances, we’re actually doing relatively OK.
How Russia is pushing its central bank to give ‘upbeat’ economic updates
The Russian government is not loving its central bank’s gloomy economic assessments. Instead, it is reportedly asking for more jolly outlooks.
The Russian economy has been under stress ever since the country invaded Ukraine in February 2022, triggering widespread sanctions from the West and its allies, which hit the energy giant’s oil and gas revenue.
Through it all, the Russian central bank has been candid about its assessment of the country’s economy, which at times stood at odds with more bullish statements from the Kremlin.
But that may soon change — Russian officials are putting pressure on the country’s central bank to give more “upbeat” assessments about the country’s economy, Bloomberg reported on Tuesday, citing people familiar with internal deliberations.
In December, analysts at the Bank of Russia — headed by governor Elvira Nabiullina — said they anticipated “new economic shocks,” due to a $60 per barrel price cap on Russian oil and the European Union’s ban on the country’s crude. In October, research from the Bank of Russia showed the country’s economic activity stalled in September — in part, due to President Vladimir Putin’s partial mobilization order that sent many fleeing the draft.
Senior government officials have criticized the central bank for mishandling market expectations and for giving forecasts that were too pessimistic and alarmist, Bloomberg reported.
The Bank of Russia, though, is open to improving these forecasts so as to send a signal that it’s on the path to monetary easing in the months ahead, per Bloomberg.
The Russian economy likely contracted by 2.5% in 2022 from a year ago, but was still beating expectations, President Vladimir Putin said in televised remarks on January 17, per Reuters.
It’s not just propaganda. Key to the central bank’s messaging is interest rates. Russia’s key interest rate is 7.5% now, but the government wants the central bank to express more optimism about the economy in a signal that it could start cutting rates, per Bloomberg. But the Bank of Russia is concerned about higher inflation should rates fall.
Russia covers its budget deficit by borrowing domestically, so interest rates are important for the government. A slump in energy revenues, coupled with an increase in defense spending has pushed Russia’s budget deficit to 1.76 trillion rubles in January, or $24.75 billion.
The deficit — which is only for the first month of 2023 — is already at 60% of Russia’s plan for a $2.93 trillion-ruble deficit, Insider previously reported.
The Bank of Russia did not respond to Insider’s request for comment sent outside regular business hours. It’s also in a communication blackout ahead of its first board meeting of 2023 on Friday, per Bloomberg.
Biden highlights economy, spars with Republicans in State of the Union speech
U.S. President Joe Biden sought to overcome pessimism about the country’s direction — and his own political prospects as he stares down a re-election bid next year — in his second State of the Union address to Congress and the nation Tuesday night.
But his optimistic vision faces stiff headwinds from Republicans in control of the House of Representatives, who the president called on to help him “finish the job” of rebuilding the economy from the COVID-19 pandemic and record inflation at home and abroad.
“The people sent us a clear message. Fighting for the sake of fighting, power for the sake of power, conflict for the sake of conflict, gets us nowhere,” Biden said. “That’s always been my vision for the country: to restore the soul of the nation, to rebuild the backbone of America — the middle class — to unite the country.
“There is no reason we can’t work together in this new Congress.”
House Speaker Kevin McCarthy, sitting behind the president for the first time since he took on the role, appeared unmoved by Biden’s pitch for bipartisanship and the listing of his administration’s accomplishments during two years of Democratic control of Congress.
McCarthy — who vowed to be “respectful” during the speech earlier Tuesday — is leading negotiations with Biden and Democratic leaders on raising the nation’s debt ceiling, which Republicans say must be tied to significant government spending cuts. Biden has pushed for a “clean” debt ceiling increase without cuts to future spending or existing programs like Social Security and Medicaid, longtime targets of fiscal conservatives.
Biden faced boos and shouts of “liar” during his speech when he mentioned some Republicans were eying changes to those programs. That led to what appeared to be an ad-libbed response from Biden, and led to a seemingly vocal pledge from members of both parties that the programs would remain untouched.
“I tell you, I enjoy consensus,” he said with a grin.
The president on Tuesday made the case that targeted government spending found in major bills he has signed like the US$1-trillion infrastructure act will achieve results in the coming months and years.
“Jobs are coming back, pride is coming back because of the choices we made in the last two years,” he said.
The speech showed Biden has shifted his focus from pushing for a flurry of major legislative victories to accepting more limited action with a divided Congress. House Republicans have vowed to undo many of those achievements while prioritizing investigations into allegations against Biden’s family and administration.
Biden promised he would veto any bill that would raise the cost of living for average Americans.
More Buy American policies
Biden has walked a delicate tightrope over the past two years, balancing the need to work with Republicans on some matters while criticizing the party’s positions. He began his term two weeks after rioters stormed the U.S. Capitol to disrupt the certification of his victory over Donald Trump, who remains a force within the Republican party.
Although he celebrated on Tuesday that democracy remained “unbowed and unbroken” two years after that Jan. 6, 2021, attack, Biden’s address showed his continued efforts to appeal to “America First” conservatives aligned with Trump’s policies while continuing to pursue Democratic priorities.
He announced new standards that will require all construction materials used in federal infrastructure projects to be made in the U.S., an expansion of his Buy American policy that has alarmed key trading partners like Canada.
“On my watch, American roads, bridges, and American highways are going to be made with American products as well,” he said.
A request for comment from Canadian Trade Minister Mary Ng’s office was not immediately returned Tuesday night.
Biden’s focus on the U.S. economy came after an unexpectedly strong jobs report last week that found unemployment fell to a 53-year low of 3.4 per cent, and over 517,000 jobs were added in January.
The White House is using those numbers and other signs of economic improvement, including falling gas prices, to counter Republican attacks and recent polling that found a majority of Americans are unsatisfied with the country’s direction and don’t want Biden to run for re-election.
Biden has not officially announced his re-election bid for 2024, which could pit him against Trump once again.
Crime and policing
Among Biden’s guests for the State of the Union was the mother and stepfather of Tyre Nichols, a Black man who died last month after being beaten by five police officers who are now charged with second-degree murder and other crimes.
Biden called for more action on national policing standards in response — a slim prospect in the divided Congress, although both parties rose to their feet to applaud the president’s remarks and Nichols’ family.
He also urged lawmakers to pursue meaningful immigration reform that would tighten border security, offer a path to citizenship for migrants who cross into the U.S. legally, and crack down on fentanyl trafficking that has led to a surge in fatal opioid overdoses.
Another guest, former House speaker Nancy Pelosi’s husband Paul Pelosi — who was brutally attacked inside the couple’s San Francisco home last year — was introduced by Biden as an example of the need to reign in domestic extremism and political violence.
“We must give hate and extremism in any form no safe harbour,” he said. “Democracy must not be a partisan issue. It’s an American issue.”
Arkansas Gov. Sarah Huckabee Sanders, who gained a national profile as Trump’s press secretary, delivered the Republican response to Biden’s speech, which he alleged was full of falsehoods.
She focused much of her remarks on social issues, including race in business and education, and alleged big-tech censorship of conservatives.
“While you reap the consequences of their failures, the Biden administration seems more interested in woke fantasies than the hard reality Americans face every day,” she said. “Most Americans simply want to live their lives in freedom and peace, but we are under attack in a left-wing culture war we didn’t start and never wanted to fight.”
Sanders also criticized Biden’s foreign policy that she alleged has made America less safe from threats posed by China and other hostile actors.
—With files from the Associated Press
Given high inflation, slowdown in Canada’s economy is ‘a good thing,’ Tiff Macklem says
Bank of Canada governor Tiff Macklem says that although a slowing economy may not seem like a good thing, it is when the economy is overheated.
Speaking in Quebec City on Tuesday, Macklem said that higher interest rates are working to cool the economy as elevated borrowing costs are constraining spending on big-ticket items such as vehicles, furniture and appliances.
As demand for goods and services falls, Macklem says the economy will continue to slow.
“That doesn’t sound like a good thing, but when the economy is overheated, it is,” he said.
In addition to global events, the overheated domestic economy pushed up prices rapidly, he said.
To slow the economy domestically, the Bank of Canada has embarked on one of the fastest monetary policy tightening cycles in its history. It has hiked its key interest rate eight consecutive times since March, bringing it from near-zero to 4.5 per cent.
However, last month, the Bank of Canada said it will take a “conditional” pause to assess the effects of higher interest rates on the economy.
“Typically, we don’t see the full effects of changes in our overnight rate for 18 to 24 months,” Macklem said on Tuesday.
“In other words, we shouldn’t keep raising rates until inflation is back to two per cent.”
However, the governor said the Bank of Canada will be ready to raise rates further if inflation proves to be more stubborn than expected.
As gas prices have fallen and supply chains have improved, inflation in Canada has slowed since peaking at 8.1 per cent in the summer. Macklem called this a “welcome development,” but stressed inflation is still too high.
“If new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further,” Macklem said.
For inflation to get back to two per cent, Macklem said wage growth will have to slow, along with other prices.
Wage gains lagging inflation
Wages have been growing rapidly for months but continue to lag the rate of inflation. In December, wages were up 5.1 per cent.
Though annual inflation is still at decades-high levels, economists have been encouraged by a more noticeable slowdown in price growth over recent months.
The Bank of Canada forecasts the annual inflation rate will fall to three per cent by mid-year and to two per cent in 2024.
Royce Mendes, an economist with Desjardins, said that Macklem is crossing his fingers that the rate hikes he has implemented so far will be enough to get it done.
“The head of the Bank of Canada seems quite comfortable sitting on the sidelines even as his U.S. counterpart will be discussing the need for further monetary tightening south of the border,” Mendes said.
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