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The Economist Magazine 29th April 2022

Central banks are supposed to inspire confidence in the economy by keeping inflation low and stable. America’s Federal Reserve has suffered a hair­raising loss of control. In March consumer prices were 8.5% higher than a year earlier, the fastest annual rise since 1981. In Washington inflation­watching is usually the preserve of wonks in shabby offices. Now nearly a fifth of Americans say inflation is the country’s most important problem; President Joe Biden has released oil from strategic reserves to try to curb petrol prices; and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.

It is the Fed, however, that had the tools to stop inflation and failed to use them in time. The result is the worst overheating in a big and rich economy in the 30­year era of inflation­targeting central banks. The good news is that inflation may have peaked at last. But the Fed’s 2% target will remain a long way off—forcing agonising choices on the central bank. Apologists for America’s policymakers point to annual price rises of 7.5% in the euro area and 7% in Britain as evidence of a global problem, driven by the soaring price of commodities, especially since Russia’s invasion of Ukraine. Nearly three­quarters of the euro zone’s inflation is attributable to rocketing energy and food prices.

America, though, benefits from abundant shale gas, and its higher incomes mean that staples have a smaller effect on average prices. Strip out energy and food and the euro zone’s inflation is 3%—but America’s is 6.5%. Also, America’s labour market, unlike Europe’s, is clearly overheating, with wages growing at an average pace of nearly 6%. Recent falls in the prices of oil, used cars and shipping probably mean that inflation will fall in the coming months. But it will stay far too high, given the underlying upward pressure on prices.

The Economist Magazine 29th April 2022

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