International Economics: IB Economics

Jeffrey Frankel looks at the role of the government in tackling US inflation, noting that US inflation was unchanged at 3.2% last month, but also noting that gasoline prices fell by 5% last month. On that basis, he wonders whether the government's policymaking deserves praise.

Spoiler alert: I suspect most Year 13 Economics students could write this article. Frankel notes that given the cost-push nature of the inflation, supply-side improvements have reduced inflation, but that the Fed should get some praise for its early increases in interest rates which have probably helped damp down the demand-side causes of inflation. 

A lovely article about the nature of monetary policy, which looks at the conduct of global central banks and also highlights the difference between demand-pull and cost-push inflation.

In essence, Philip Inman argues that current rhetoric about tightening monetary policy to tackle inflation has had, and will have, little effect upon it, in large part because inflation is driven by higher energy prices. 

An introductory primer: what is inflation and why is inflation occurring at the moment. It looks at the concept at a very basic level, emphasising the fact that it's a sustained increase in the general price level. 

The BBC has produced a handy little primer should you be writing about inflation, identifying the global factors that have driven inflation. Those seven factor are: energy prices, goods shortages, shipping costs, rising wages, climate impacts, trade barriers and the end of pandemic support, if you're interested. 

It's been an interesting week for monetary policy across the world - Turkey is looking to tackle rising inflation by lowering interest rates, but South Korea and New Zealand are adopting the more orthodox strategy of raising then with inflation predicted to go above target and pose a threat to the post-pandemic recovery.

Which is the right strategy? Only time will tell. Or rather - I think we already know - but you might still query whether raising interest rates is appropriate if you're dealing with cost-push inflation. 

The Food and Drink Federation boss Ian Wright told the Business, Energy and Industrial Strategy select committee that inflation is running between 14%-18% for hospitality firms. 

Currently, UK inflation is 3.2% more generally, but it's heading upwards, and there are concerns about the extent to which the Bank of England has the policy tools to deal with it, given its cost-push nature. 

Equally, unlike many, the boss of the industry group has recognised that the costs of inflation are unevenly distributed.

US inflation continues to fall down to 4% more than half of UK inflation, and largely as a result of falling food and petrol prices. It would seem that other economies are coming through their supply-side shocks more rapidly than we are.  

A relatively simple question to answer: US stimulus spending to cushion the effects of the pandemic. 

Inflation - according to Keynesians - has two causes: demand-pull, caused by higher levels of expenditure; cost-push, caused by higher costs. And the US currently has both.

Of course, monetarists would have a different view...

Everyone's 'favourite Finance Minister, Yanis Varoufakis, writes in the Guardian arguing that central banks have a tough task ahead, in controlling inflation, especially because the costs of inflation fall disproportionately on the poor. 

However, he looks into why they are contemplating interest rate rises at a time when the almost all inflationary pressure is cost-push, and then weighs up how this imperative might be balanced against the need to encourage green investment. As with much in economics, it's all about trade-offs. 

Inflation's up in the Eurozone too - reaching 4.9% last month - the highest figure since the creation of the Euro and well above the 2% target. 

Much like the UK, the bulk of this inflationary pressure is cost-push, and some worry that it's already being reflected in higher wage claims which may stoke a wage-price spiral. The flip side of this is that the uncertainty associated with the Omicron variant means that policymakers are wary of acting decisively at this stage. 

The Turkish monetary authorities raised interest rates by 1% (or 100 basis points) and saw the currency fall in value by 6%. And President Erdogan's argument - that high interest rates have been the cause of inflation - seems somewhat detached from economic reality, with most people being of the view that interest rates are a powerful anti-inflationary tool, if the cause of inflation is demand-pull.

Of course, lowering rates, and the subsequent fall in the value of the currency, is likely to worsen the situation - imports will have become more expensive, and exporters will have less of an incentive to keep their costs in check too. It looks as though the government might have lost control of the economy.

The OECD is forecasting higher inflation across the developed world, with the UK expected to have 3% inflation by the end of 2022, but falling inflation in a number of other economies. 

The causes? Self-evident to be honest - higher raw material costs, supply chain issues and higher levels of consumer demand all play a part and can be shown by elementary AD-AS analysis.