Rising prices have been in sharp focus in the U.S., but inflation also is gaining pace around the world, according to the Organisation for Economic Co-operation and Development (OECD). Some countries are even starting to tighten monetary policy because of it, although the U.S. is not one of them.
- Annual inflation in OECD countries rose to 3.3% in April, the highest level since October 2008.
- Some of that could be attributed to coming off last year’s very low cost of energy during the pandemic, when economies shut down to slow the spread of COVID-19, but even without energy, inflation showed sizeable gains.
- The U.S. led inflation gains, but among the top three countries with the largest increases, the Fed is the only central bank that hasn’t moved to address higher prices.
Annual inflation in the 38 OECD countries rose in April to 3.3%, its highest level since October 2008 and up from 2.4% in March. The OECD is an intergovernmental group that monitors economic and social policies around the world.
Energy prices went up the most, 16.3%, the highest since September 2008 and up from 7.4% the prior month. Food prices, on the other hand, went up only 1.6% month-over-month, compared with a 2.7% increase in March. Without the volatile food and energy sectors, prices still rose 2.4% in April, compared with 1.8% in March, although the increases varied widely across nations. It’s important to note that some of the outsized increases are due to base effects, or a comparison to a very low level as countries started to lock down last spring to slow the spread of COVID-19.
After a year of loose global monetary policy aimed at helping people weather the lockdowns, inflation has become the topic of 2021. Many economists fear that all the money governments and central banks have unleashed, coupled with lingering supply bottlenecks and pent-up demand, are stoking inflation in all parts of the world. While some central banks have already geared up to ward off inflation, the Federal Reserve has no immediate plans to raise interest rates or begin tapering of treasury purchases.
In a surprise move Wednesday, however, the Fed did announce that on June 7 it would begin to slowly liquidate its portfolio of corporate bond exchange-traded funds, which it accumulated to assuage financial markets and provide liquidity during the pandemic. However, it is important to note this is unrelated to the Fed’s commitment to quantitative easing, its treasury bond buying program, or to interest rates.
The U.S. led the pack in terms of gains in inflation, posting a rate of 4.2% in April, up from 2.6% in March, while Canada’s rate was 3.4%, up from 2.2% the prior month, and the U.K. was 1.6%, up from 1% in March, according to the OECD. Among these countries, the U.S. is the only one that has not yet made a move toward tightening policy.
In April, the Bank of Canada cut its weekly bond purchases and said it could raise interest rates in the second half of next year. The Bank of England followed suit, saying in May it would slow the pace of its bond-buying program.
Meanwhile, U.S. Fed Chairman Jerome Powell has acknowledged inflation has risen and will likely go higher, but he maintained that any increases would be “transitory.” He said the economy still had to show “substantial further progress” toward the Fed’s maximum employment and price stability goals before it would discuss tapering.
The Fed’s insistence on keeping monetary policy loose, in spite of rising inflation and the policy decisions of other countries, has many economists alarmed the Fed is falling behind the inflation curve.
“We used to have a Fed that reassured people that it would prevent inflation,” said former U.S. Treasury Secretary Lawrence Summers in an interview last week broadcast at Coindesk’s Consensus 2021 meeting. “Now we have a Fed that reassures people that it won’t worry about inflation until it’s staggeringly self-evident...The Fed’s idea used to be it’d remove the punch bowl before the party got good. Now the Fed’s doctrine is that it will only remove the punch bowl after it sees some people staggering around drunk.”