Last week, Eurostat, the statistical agency of the European Union, published a revised estimate the February inflation rate in the euro zone. It was not a happy report: consumer prices rose 5.9% from a year earlier, more than most analysts had done. expected. And it will get worse, as the effects of the war in Ukraine weigh on food and energy prices.
Britain has yet to release its February inflation figure, but the bank of england expects it to match the Eurozone rate.
Sure, US inflation is even higher, with consumer prices in February up 7.9% year-on-year. These figures are not exactly comparable, for technical reasons, but inflation in the United States seems to revolve around two percentage points more than in Europe. I will come back to this difference and what could explain it. But the fact that inflation is soaring in many countries, not just America, is certainly worth noting.
After all, the entire Republican Party and a good number of conservative Democrats insist that the recent spike in US inflation was caused by President Biden’s big spending policies. Europe, however, had nothing to compare to Biden’s US bailout; last year, the euro area structural budget deficita standard measure of fiscal stimulus, was only about one-third as large, as a percentage of GDP, as america.
So why is inflation on the rise in Europe?
Part of the answer lies in rising energy prices. Last week, I noted that Kevin McCarthy, the Republican House Minority Leader, said gas prices “are not Putin’s gas prices. These are President Biden’s gas prices. Allow me to elaborate on the absurdity of this assertion, using UK data.
At the end of December 2020, petrol in Britain cost 116 pence per litre, or $5.94 per gallon. By mid-March, that was at $8.23 a gallon. During the same period Gas prices in the United States went from $2.24 to $4.32. Given the high UK petrol taxes, the price increases have been similar, even though Joe Biden is not, to my knowledge, the UK Prime Minister.
But it’s not just energy prices. Inflation in the United States has been driven in part by ongoing supply chain issues, with a significant shift in demand toward commodities weighing on ports, shipping capacity and more; these same strains, which have lasted much longer than many of us expected, also afflicted Europe.
So what does high inflation in Europe tell us? First, that much – perhaps two-thirds – of the acceleration in US inflation reflects global forces rather than specifically US policies and developments. Second, because these global forces could subside if we finally emerge from this dark tunnel of pandemic and war, US inflation could eventually drop significantly, even without drastic policy changes. (Notice how I avoided using the word “transient”? Oh wait.)
That said, inflation is accelerating on this side of the Atlantic. Why? A major factor, almost surely, is that the United States economy has recovered faster than that of Europe. In the fourth quarter of 2021, real gross domestic product in the United States was 3% higher than it was before the pandemic, while the euro zone had barely recouped its losses. And in case you’re wondering, you don’t need to factor in those numbers for faster US population growth; our working-age population has actually stagnated since 2019, largely thanks to a immigration collapse.
And US economic growth has helped workers as well as GDP Although real hourly wages have been eroded by inflation, total labor compensation is on the rise 13.6% since the eve of the pandemic, against only 5.2% in Europe.
Now excessive inflation suggests that recent US economic growth has been too good. Our economy clearly appears to be overheating, which is why the Federal Reserve is right to have started raising interest rates and should continue to do so until inflation subsides.
But while overheating is a problem, we shouldn’t let it overshadow the good things that have happened. We have recovered quickly from the pandemic recession and appear to have avoided the long term”healingeffects that many feared. Most, but not all, of the inflation we are experiencing likely reflects temporary global forces and multiple indicators – consumer surveys, professional forecasters and financial markets — suggest that longer-term inflation expectations remain “anchored”, ie inflation does not take root in the economy.
There remains the question of why Americans feel so bad about the economy, or at least tell pollsters they feel bad (they spend like they’re bullish). We are not unique in this respect: Europeans consumer sentiment also took a hit against inflation, although nothing like the dive we have seen here. But this is a subject to which I will return another day.
For now, I would simply urge Americans to look at their economy in the European mirror. Recovering from the pandemic was always going to be difficult, and Vladimir Putin made it even harder. But under the circumstances, we’re doing relatively well.
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