Controlling global inflation could spur recession in some countries

The United States is not alone in facing stubborn inflation, and the Federal Reserve is not the only central bank trying to bring it under control by raising interest rates.

A few dozen central banks around the world raised rates – in England, Mexico, Canada, Argentina, India, South Africa and Australia. Brazil and Saudi Arabia raised rates just after the Fed on Wednesday. The European Central Bank has announced that it will follow suit next month.

During his press conference on Wednesday, Fed Chairman Jay Powell tried to put inflation here in a global context: “It’s not just here. In fact, we’re kind of at the middle of the pack.Although I think we have, of course, a different type of inflation than others, and partly because our economy is stronger and more strongly recovered.

In other words, every country’s economy is different and some may be more vulnerable to inflation, higher interest rates – and recession – than ours. There are global forces driving inflation in almost every economy, and they are really hard to tame with interest rates alone.

“Pressures on prices for commodities like energy and food – largely due to Russia’s invasion of Ukraine,” said Joseph Gagnon of the Peterson Institute for International Economics. “COVID shuts down factories, creates problems in the shipping industry. It affects many countries.

But there’s a big difference between the United States and many other countries: We’ve had such massive government stimulus for businesses and households that we’ve regained pre-Century employment and gross domestic product. pandemic. Others weren’t so lucky.

“Europe and Japan have not returned to previous employment or production levels,” Gagnon said.

Europe also has an even bigger problem with oil and gas inflation because, unlike the United States, it produces virtually nothing, said Michael Pearce of Capital Economics.

“US consumers complain about paying $5 for gas, but the energy squeeze in Europe has been much more severe, including on household energy bills,” he said.

All of this means that as central banks raise interest rates in an attempt to fight inflation, Europe and other weaker economies are closer to tipping into recession. The risk is even higher for poor countries. Many depend on grain exports from Russia and Ukraine, said Sharyn O’Halloran, a political economist at Columbia University.

“Africa and the Middle East are always on these peak situations, so these types of disruptions can be very significant,” O’Halloran said.

The United States has another big advantage globally, said Infrastructure Capital’s Jay Hatfield. “The rest of the world is following the Fed. So every time they raise their rates, other countries really have to do it to defend their currency.

This prominence means that capital will continue to flow into the United States from weaker economies, and the domestic economy may simply avoid tipping into recession.

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