The Federal Reserve has embarked on an aggressive campaign to raise interest rates as it tries to tame the most rapid inflation in decades, an effort the central bank sees as necessary to restore price stability in the United States.
But what the Fed does at home reverberates across the globe, and its actions are raising the risks of a global recession while causing economic and financial pain in many developing countries.
Other central banks in advanced economies, from Australia to the eurozone, are also lifting rates rapidly to fight their inflation. And as the Fed’s higher interest rates attract money to the United States — pumping up the value of the dollar — emerging-market economies are being forced to raise their own borrowing costs to try to stabilize their currencies to the extent possible.
Altogether, it is a worldwide push toward more expensive money unlike anything seen before in the 21st century, one that is likely to have serious ramifications.
warned the damage could be particularly acute in poorer nations. Developing economies had already been dealing with a cost-of-living crisis because of soaring food and fuel prices, and now their American imports are growing steadily more expensive as the dollar marches higher.
The Fed’s moves have spurred market volatility and worries about financial stability, as higher rates elevate the value of the U.S. dollar, making it harder for emerging-market borrowers to pay back their dollar-denominated debt.
It is a recipe for globe-spanning turmoil and even recession. Despite that, the Fed is poised to continue raising interest rates. That’s because the Fed, like central banks around the world, is in charge of domestic economy goals: It’s supposed to keep inflation slow and steady while fostering maximum employment. While occasionally called “central banker to the world” because of the dollar’s foremost position, the Fed goes about its day-to-day business with its eye squarely on America.
loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
The threat facing the global economy — including the Fed’s role in it — is expected to dominate the conversation next week as economists and government officials convene in Washington for the annual meeting of the International Monetary Fund and World Bank.
In a speech at Georgetown University on Thursday, Kristalina Georgieva, the managing director of the I.M.F., offered a grim assessment of the world economy and the tightrope that central banks are walking.
“Not tightening enough would cause inflation to become de-anchored and entrenched — which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people,” Ms. Georgieva said. “On the other hand, tightening monetary policy too much and too fast — and doing so in a synchronized manner across countries — could push many economies into prolonged recession.”
Noting that inflation remains stubbornly high and broad-based, she added: “Central banks have to continue to respond.”
The World Bank warned last month that simultaneous interest-rate increases around the world could trigger a global recession next year, causing financial crises in developing economies. It urged central banks in advanced economies to be mindful of the cross-border “spillover effects.”
“To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production,” David Malpass, the World Bank president, said.
Trade and Development Report said.
So far, major central banks have shown little appetite for stopping their inflation-busting campaigns. The Fed, which has made five rate increases this year, has signaled that it plans to raise borrowing costs even higher. Most officials expect to increase rates by at least another 1.25 percentage points this year, taking the policy rate to a range of 4.25 to 4.5 percent from the current 3 to 3.25 percent.
Even economies that are facing a pronounced slowdown have been lifting borrowing costs. The European Central Bank raised rates three-quarters of a point last month, even though the continent is approaching a dark winter of slowing growth and crushing energy costs.
according to the World Bank. Food costs in particular have driven millions further into extreme poverty, exacerbating hunger and malnutrition. As the dollar surge makes a range of imports pricier for emerging markets, that situation could worsen, even as the possibility of financial upheaval increases.
“Low-income developing countries in particular face serious risks from food insecurity and debt distress,” Ngozi Okonjo-Iweala, director-general of the World Trade Organization, said during a news conference this week.
Understand Inflation and How It Affects You
In Africa, officials have been urging the I.M.F. and Group of 20 nations to provide more emergency assistance and debt relief amid inflation and rising interest rates.
“This unprecedented shock further destabilizes the weakest economies and makes their need for liquidity even more pressing, to mitigate the effects of widespread inflation and to support the most vulnerable households and social strata, especially young people and women,” Macky Sall, chairman of the African Union, told leaders at the United Nations General Assembly in September.
To be sure, central bankers in big developed economies like the United States are aware that they are barreling over other economies with their policies. And although they are focused on domestic goals, a severe weakening abroad could pave the way for less aggressive policy because of its implications for their own economic outlooks.
Waning demand from abroad could ease pressure on supply chains and reduce prices. If central bankers decide that such a chain reaction is likely to weigh on their own business activity and inflation, it may give them more room to slow their policy changes.
“The global tightening cycle is something that the Fed has to take into account,” said Megan Greene, global chief economist for the Kroll consulting firm. “They’re interested in what is going on in the rest of the world, inasmuch as it affects their ability to achieve their targets.”
his statement.
But many global economic officials — including those at the Fed — remain focused on very high inflation. Investors expect them to make another large rate increase when they meet on Nov. 1-2.
“We’re very attentive” to international spillovers to both emerging markets and advanced economies, Lisa D. Cook, a Fed governor, said during a question-and-answer session on Thursday. “But our mandate is domestic. So we’re very focused on inflation as it evolves in this country.”
Raghuram Rajan, a former head of India’s central bank and now an economist at the University of Chicago, has in the past pushed the Fed to take foreign conditions into account as it sets policy. He still thinks that measures like bond-buying should be pursued with an eye on global spillovers.
But amid high inflation, he said, central banks are required to pay attention to their own mandates to achieve price stability — even if that makes for a stronger dollar, weaker currencies and more pain abroad.
“The basic problem is that the world of monetary policy dances to the Fed’s tune,” Mr. Rajan said, later adding: “This is a problem with no easy solutions.”
The central bank raised its key short-term rate by a substantial three-quarters of a point for the third consecutive time.
Intensifying its fight against high inflation, the Federal Reserve raised its key interest rate Wednesday by a substantial three-quarters of a point for a third straight time and signaled more large rate hikes to come — an aggressive pace that will heighten the risk of an eventual recession.
The Fed’s move boosted its benchmark short-term rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level since early 2008.
The officials also forecast that they will further raise their benchmark rate to roughly 4.4% by year’s end, a full percentage point higher than they had forecast as recently as June. And they expect to raise the rate further next year, to about 4.6%. That would be the highest level since 2007.
On Wall Street, stock prices fell and bond yields rose in response to the Fed’s projection of further steep rate hikes ahead.
Related StoryU.S. Stocks Fall Broadly Ahead Of Key Fed Decision On Rates
The central bank’s action Wednesday followed a government report last week that showed high costs spreading more broadly through the economy, with price spikes for rents and other services worsening even though some previous drivers of inflation, such as gas prices, have eased. By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.
Fed officials have said they’re seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession. Yet economists increasingly say they think the Fed’s steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.
In their updated economic forecasts, the Fed’s policymakers project that economic growth will remain weak for the next few years, with rising unemployment. It expects the jobless rate to reach 4.4% by the end of 2023, up from its current level of 3.7%. Historically, economists say, any time the unemployment rate has risen by a half-point over several months, a recession has always followed.
Fed officials now see the economy expanding just 0.2% this year, sharply lower than its forecast of 1.7% growth just three months ago. And it expects sluggish growth below 2% from 2023 through 2025.
And even with the steep rate hikes the Fed foresees, it still expects core inflation — which excludes the volatile food and gas categories — to be 3.1% at the end of next year, well above its 2% target.
Chair Jerome Powell acknowledged in a speech last month that the Fed’s moves will “bring some pain” to households and businesses. And he added that the central bank’s commitment to bringing inflation back down to its 2% target was “unconditional.”
Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier. Declining gas prices might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.
Related StoryLong-Term Mortgage Rates Now At Highest Point Since 2008
Short-term rates at a level the Fed is now envisioning would make a recession likelier next year by sharply raising the costs of mortgages, car loans and business loans. The economy hasn’t seen rates as high as the Fed is projecting since before the 2008 financial crisis. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.
Inflation now appears increasingly fueled by higher wages and by consumers’ steady desire to spend and less by the supply shortages that had bedeviled the economy during the pandemic recession. On Sunday, though, President Biden said on CBS’ “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting that his administration’s recent energy and health care legislation would lower prices for pharmaceuticals and health care.
Some economists are beginning to express concern that the Fed’s rapid rate hikes — the fastest since the early 1980s — will cause more economic damage than necessary to tame inflation. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases – a key driver of inflation — are levelling off and by some measures even declining a bit.
Surveys also show that Americans are expecting inflation to ease significantly over the next five years. That is an important trend because inflation expectations can become self-fulfilling: If people expect inflation to ease, some will feel less pressure to accelerate their purchases. Less spending would then help moderate price increases.
Konczal said there is a case to be made for the Fed to slow its rate hikes over the next two meetings.
“Given the cooling that’s coming,” he said, “you don’t want to rush into this.”
The Fed’s rapid rate hikes mirror steps that other major central banks are taking, contributing to concerns about a potential global recession. The European Central Bank last week raised its benchmark rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all carried out hefty rate increases in recent weeks.
And in China, the world’s second-largest economy, growth is already suffering from the government’s repeated COVID lockdowns. If recession sweeps through most large economies, that could derail the U.S. economy, too.
Even at the Fed’s accelerated pace of rate hikes, some economists — and some Fed officials — argue that they have yet to raise rates to a level that would actually restrict borrowing and spending and slow growth.
Many economists sound convinced that widespread layoffs will be necessary to slow rising prices. Research published earlier this month under the auspices of the Brookings Institution concluded that unemployment might have to go as high as 7.5% to get inflation back to the Fed’s 2% target.
Only a downturn that harsh would reduce wage growth and consumer spending enough to cool inflation, according to the research, by Johns Hopkins University economist Laurence Ball and two economists at the International Monetary Fund.
Russia’s invasion of Ukraine and the continuing effects of the pandemic have hobbled countries around the globe, but the relentless series of crises has hit Europe the hardest, causing the steepest jump in energy prices, some of the highest inflation rates and the biggest risk of recession.
The fallout from the war is menacing the continent with what some fear could become its most challenging economic and financial crisis in decades.
While growth is slowing worldwide, “in Europe it’s altogether more serious because it’s driven by a more fundamental deterioration,” said Neil Shearing, group chief economist at Capital Economics. Real incomes and living standards are falling, he added. “Europe and Britain are just worse off.”
eightfold increase in natural gas prices since the war began presents a historic threat to Europe’s industrial might, living standards, and social peace and cohesion. Plans for factory closings, rolling blackouts and rationing are being drawn up in case of severe shortages this winter.
China, a powerful engine of global growth and a major market for European exports like cars, machinery and food, is facing its own set of problems. Beijing’s policy of continuing to freeze all activity during Covid-19 outbreaks has repeatedly paralyzed large swaths of the economy and added to worldwide supply chain disruptions. In the last few weeks alone, dozens of cities and more than 300 million people have been under full or partial lockdowns. Extreme heat and drought have hamstrung hydropower generation, forcing additional factory closings and rolling blackouts.
refusing to pay their mortgages because they have lost confidence that developers will ever deliver their unfinished housing units. Trade with the rest of the world took a hit in August, and overall economic growth, although likely to outrun rates in the United States and Europe, looks as if it will slip to its slowest pace in a decade this year. The prospect has prompted China’s central bank to cut interest rates in hopes of stimulating the economy.
“The global economy is undoubtedly slowing,” said Gregory Daco, chief economist at the global consulting firm EY- Parthenon,but it’s “happening at different speeds.”
In other parts of the world, countries that are able to supply vital materials and goods — particularly energy producers in the Middle East and North Africa — are seeing windfall gains.
And India and Indonesia are growing at unexpectedly fast paces as domestic demand increases and multinational companies look to vary their supply chains. Vietnam, too, is benefiting as manufacturers switch operations to its shores.
head-spinning energy bills this winter ratcheted up this week after Gazprom, Russia’s state-owned energy company, declared it would not resume the flow of natural gas through its Nord Stream 1 pipeline until Europe lifted Ukraine-related sanctions.
Daily average electricity prices in Western Europe have reached record levels, according to Rystad Energy, surging past 600 euros ($599) per megawatt-hour in Germany and €700 in France, with peak-hour rates as high as €1,500.
In the Czech Republic, roughly 70,000 angry protesters, many with links to far-right groups, gathered in Wenceslas Square in Prague this past weekend to demonstrate against soaring energy bills.
The German, French and Finnish governments have already stepped in to save domestic power companies from bankruptcy. Even so, Uniper, which is based in Germany and one of Europe’s largest natural gas buyers and suppliers, said last week that it was losing more than €100 million a day because of the rise in prices.
International Monetary Fund this week to issue a proposal to reform the European Union’s framework for government public spending and deficits.
caps blunt the incentive to reduce energy consumption — the chief goal in a world of shortages.
Central banks in the West are expected to keep raising interest rates to make borrowing more expensive and force down inflation. On Thursday, the European Central Bank raised interest rates by three-quarters of a point, matching its biggest increase ever. The U.S. Federal Reserve is likely to do the same when it meets this month. The Bank of England has taken a similar position.
The worry is that the vigorous push to bring down prices will plunge economies into recessions. Higher interest rates alone won’t bring down the price of oil and gas — except by crashing economies so much that demand is severely reduced. Many analysts are already predicting a recession in Germany, Italy and the rest of the eurozone before the end of the year. For poor and emerging countries, higher interest rates mean more debt and less money to spend on the most vulnerable.
“I think we’re living through the biggest development disaster in history, with more people being pushed more quickly into dire poverty than has every happened before,” said Mr. Goldin, the Oxford professor. “It’s a particularly perilous time for the world economy.”
At the Saku beer factory in Estonia, the mammoth copper brew kettles sit side by side like household sink plungers stored on a shelf in a manor house for giants. The brewery has been around for 200 years, but this is the first time in memory that the company has planned two price rises — of 10 percent each — in a single year.
And even that double-barreled increase won’t be enough to cover the brewery’s skyrocketing costs, said Jaan Harms, a board member at Saku.
“We are in an environment of increasing inflation, and, of course, energy is by far the main driver,” Mr. Harms said. When its energy contracts run out at the end of the summer, the company’s gas costs will rise 400 percent and the electricity bills will double, he said. And because the providers of every product and service they buy are also dealing with soaring fuel prices, those costs are rising as well.
estimates released Wednesday by the European Commission’s statistical office.
3 percent — a level that at the time set off alarms for reaching a decade-long high, but that would now be greeted with relief.
European Central Bank is scheduled to meet, is likely to reinforce the view that interest rates need to be raised again to curb inflation, despite the risk of recession.
Speaking at an economic summit near Jackson, Wyo., over the weekend, Isabel Schnabel, a member of the bank’s executive board, warned that inflation was more persistent than expected and said the bank needed to act “forcefully.”
“Inflation volatility has surged beyond the levels seen during the 1970s,” Ms. Schnabel said, a result of the coronavirus pandemic, the war in Ukraine and climate change that is causing widespread drought, wildfires and other extreme weather.
nearly double in October, making it difficult for millions of people to heat their homes this winter.
inflation hit 8.5 percent in July, still high but a decline from the 9.1 percent registered in June as prices for gas, airfares, used cars and hotel rooms fell.
agreement with the European Union to temporarily cap electricity prices at €40 per megawatt-hour. Professors at the Instituto Superior de Engenharia in Lisbon and at Complutense University in Madrid calculated that prices were 15 to 18 percent lower than they would have been without the cap.
Elsewhere in Europe, prices for electricity in August set eye-popping records, according to Rystad Energy, a consultancy in Norway, with an average price of €547 per megawatt-hour.
glass bottles from its Russian supplier after the outbreak of the war in Ukraine. Since then, wholesale bottle prices have shot up 20 to 80 percent.
solar panels atop its warehouses and brewery this summer, and it now boasts the country’s largest industrial rooftop solar park. In addition, the thermostats in offices will be lowered by 2 degrees this winter.
The energy crisis has also spurred the brewery to reconsider a proposal it had shelved as too expensive: the construction of a water treatment plant. The energy savings previously were not large enough to justify the cost. “But we are now thinking of doing this because the rules of the game have changed so much,” Mr. Harms said.
Saku’s initial price increase has gone through, but so far, there has not been a drop in sales. Summer vacation is prime season, Mr. Harms said, and when the weather is warm in this northern European country, people spend and drink.
But like the rest of Europe, Estonia is preparing for a dark winter.
Central bankers around the world are lifting interest rates at an aggressive clip as rapid inflation persists and seeps into a broad array of goods and services, setting the global economy up for a lurch toward more expensive credit, lower stock and bond values and — potentially — a sharp pullback in economic activity.
It’s a moment unlike anything the international community has experienced in decades, as countries around the world try to bring rapid price increases under control before they become a more lasting part of the economy.
Inflation has surged across many advanced and developing economies since early 2021 as strong demand for goods collided with shortages brought on by the pandemic. Central banks spent months hoping that economies would reopen and shipping routes would unclog, easing supply constraints, and that consumer spending would return to normal. That hasn’t happened, and the war in Ukraine has only intensified the situation by disrupting oil and food supplies, pushing prices even higher.
is expected to make its first rate increase since 2011, one that officials have signaled will most likely be only a quarter point but will probably be followed by a larger move in September.
Other central banks have begun moving more aggressively already, with officials from Canada to the Philippines picking up the pace of rate increases in recent weeks amid fears that consumers and investors are beginning to expect steadily higher prices — a shift that could make inflation a more permanent feature of the economic backdrop. Federal Reserve officials have also hastened their response. They lifted borrowing costs in June by the most since 1994 and suggested that an even bigger move is possible, though several in recent days have suggested that speeding up again is not their preferred plan for the upcoming July meeting and that a second three-quarter-point increase is most likely.
As interest rates jump around the world, making money that has been cheap for years more expensive to borrow, they are stoking fears among investors that the global economy could slow sharply — and that some countries could find themselves plunged into painful recessions. Commodity prices, some of which can serve as a barometer of expected consumer demand and global economic health, have dropped as investors grow jittery. International economic officials have warned that the path ahead could prove bumpy as central banks adjust policy and as the war in Ukraine heightens uncertainty.
blog post on Wednesday. Ms. Georgieva argued that central banks need to react to inflation, saying that “acting now will hurt less than acting later.”
rising consumer prices and declining spending, the American economy is showing clear signs of slowing down, fueling concerns about a potential recession. Here are other eight measures signaling trouble ahead:
Consumer confidence. In June, the University of Michigan’s survey of consumer sentiment hit its lowest level in its 70-year history, with nearly half of respondents saying inflation is eroding their standard of living.
The housing market. Demand for real estate has decreased, and construction of new homes is slowing. These trends could continue as interest rates rise, and real estate companies, including Compass and Redfin, have laid off employees in anticipation of a downturn in the housing market.
Copper. A commodity seen by analysts as a measure of sentiment about the global economy — because of its widespread use in buildings, cars and other products — copper is down more than 20 percent since January, hitting a 17-month low on July 1.
Oil. Crude prices are up this year, in part because of supply constraints resulting from Russia’s invasion of Ukraine, but they have recently started to waver as investors worry about growth.
The bond market. Long-term interest rates in government bonds have fallen below short-term rates, an unusual occurrence that traders call a yield-curve inversion. It suggests that bond investors are expecting an economic slowdown.
In recent years, emerging markets have often raised interest rates in anticipation of the Fed’s slow and steady moves to avoid big swings in their currency values, which depend partly on interest rate differences across borders. But this set of rate increases is different: Inflation is running at its fastest pace in decades in many places, and a range of developed-economy central banks, including the European Central Bank, the Swiss National Bank, the Bank of Canada and the Reserve Bank of Australia, are joining — or may join — the Fed in pushing rates quickly higher.
“It’s not something we’ve seen in the last few decades,” said Bruce Kasman, chief economist and head of global economic research at JPMorgan Chase.
The last time so many major nations abruptly raised rates in tandem to fight such rapid inflation was in the 1980s, when the contours of global central banking were different: The 19-country euro currency bloc that the E.C.B. sets policy for did not exist yet, and global financial markets were less developed.
That so many central banks are now facing off against rapid inflation — and trying to control it by slowing their economies — increases the chance for market turmoil as an era of very low rates ends and as nations and companies try to adjust to changing capital flows. Those changing flows can influence whether countries and businesses are able to sell debt and other securities to raise money.
“Financial conditions have tightened due to rising, broad-based inflationary pressures, geopolitical uncertainty brought on by Russia’s war against Ukraine, and a slowdown in global growth,” Janet L. Yellen, the U.S. Treasury secretary, said in speech last week. “Now, portfolio investment is beginning to flow out of emerging markets.”
fastest pace since 1983. In the United Kingdom, it is similarly at a 40-year-high.
kick off rate increases back in December and has been steadily raising rates since. Policymakers are increasingly worried about inflation creating a cost-of-living crisis in Britain and worry that higher rates could compound economic pain. At the same time, they have signaled that they could act more forcefully, taking their cue from their global peers. There is a “willingness — should circumstances require — to adopt a faster pace of tightening,” Huw Pill, the chief economist of the Bank of England, said this month.
Understand Inflation and How It Impacts You
“Many central banks are looking at this as a sort of existential question about getting inflation and inflation expectations down,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
The Fed raised rates by a quarter point in March, half a point in May, and three-quarters of a percentage point in June. While its officials have predicted that they will maintain that pace in July, they have also been clear that an even bigger rate increase is possible.
“Inflation has to be our focus, every meeting and every day,” Christopher Waller, a Fed governor, said during a speech last week. “The spending and pricing decisions people and businesses make every day depend on their expectations of future inflation, which in turn depend on whether they believe the Fed is sufficiently committed to its inflation target.”
The Bank of Canada has already gone for a full percentage point move, surprising investors last week with its largest move since 1998, while warning of more to come.
said in a statement.
of other central banks have made big moves. More action is coming. Central banks around the world have been clear that they expect to keep moving borrowing costs higher into the autumn.
“I wouldn’t say we’re at peak tightening quite yet,” said Brendan McKenna, an economist at Wells Fargo. “We could go even more aggressive from here.”
A key question is what that will mean for the global economy. The World Bank in June projected in a report that global growth would slow sharply this year but remain positive. Still, there is “considerable” risk of a situation in which growth stagnates and inflation remains high, David Malpass, head of the World Bank, wrote.
If inflation does become entrenched, or even show signs of shifting expectations, central banks may have to respond even more aggressively than they are now, intentionally crushing growth.
Mr. Kasman said the open question, when it comes to the Fed, is: “How far have they gone toward the conclusion that they need to kick us in the teeth, here?”
This past week brought home the magnitude of the overlapping crises assailing the global economy, intensifying fears of recession, job losses, hunger and a plunge on stock markets.
At the root of this torment is a force so elemental that it has almost ceased to warrant mention — the pandemic. That force is far from spent, confronting policymakers with grave uncertainty. Their policy tools are better suited for more typical downturns, not a rare combination of diminishing economic growth and soaring prices.
Major economies including the United States and France reported their latest data on inflation, revealing that prices on a vast range of goods rose faster in June than anytime in four decades.
China reported that its economy, the world’s second-largest, expanded by a mere 0.4 percent from April through June compared with the same period last year. That performance — astonishingly anemic by the standards of recent decades — endangered prospects for scores of countries that trade heavily with China, including the United States. It reinforced the realization that the global economy has lost a vital engine.
The specter of slowing economic growth combined with rising prices has even revived a dreaded word that was a regular part of the vernacular in the 1970s, the last time the world suffered similar problems: stagflation.
Most of the challenges tearing at the global economy were set in motion by the world’s reaction to the spread of Covid-19 and its attendant economic shock, even as they have been worsened by the latest upheaval — Russia’s disastrous attack on Ukraine, which has diminished the supply of food, fertilizer and energy.
“The pandemic itself disrupted not only the production and transportation of goods, which was the original front of inflation, but also how and where we work, how and where we educate our children, global migration patterns,” said Julia Coronado, an economist at the University of Texas at Austin, speaking this past week during a discussion convened by the Brookings Institution in Washington. “Pretty much everything in our lives has been disrupted by the pandemic, and then we layer on to that a war in Ukraine.”
Great Supply Chain Disruption.
meat production to shipping exploited their market dominance to rack up record profits.
The pandemic prompted governments from the United States to Europe to unleash trillions of dollars in emergency spending to limit joblessness and bankruptcy. Many economists now argue that they did too much, stimulating spending power to the point of stoking inflation, while the Federal Reserve waited too long to raise interest rates.
8 Signs That the Economy Is Losing Steam
Card 1 of 9
Worrying outlook. Amid persistently high inflation, rising consumer prices and declining spending, the American economy is showing clear signs of slowing down, fueling concerns about a potential recession. Here are other eight measures signaling trouble ahead:
Consumer confidence. In June, the University of Michigan’s survey of consumer sentiment hit its lowest level in its 70-year history, with nearly half of respondents saying inflation is eroding their standard of living.
The housing market. Demand for real estate has decreased, and construction of new homes is slowing. These trends could continue as interest rates rise, and real estate companies, including Compass and Redfin, have laid off employees in anticipation of a downturn in the housing market.
Copper. A commodity seen by analysts as a measure of sentiment about the global economy — because of its widespread use in buildings, cars and other products — copper is down more than 20 percent since January, hitting a 17-month low on July 1.
Oil. Crude prices are up this year, in part because of supply constraints resulting from Russia’s invasion of Ukraine, but they have recently started to waver as investors worry about growth.
The bond market. Long-term interest rates in government bonds have fallen below short-term rates, an unusual occurrence that traders call a yield-curve inversion. It suggests that bond investors are expecting an economic slowdown.
Now playing catch-up, central banks like the Fed have moved assertively, lifting rates at a rapid clip to try to snuff out inflation, even while fueling worries that they could set off a recession.
Given the mishmash of conflicting indicators found in the American economy, the severity of any slowdown is difficult to predict. The unemployment rate — 3.6 percent in June — is at its lowest point in almost half a century.
American consumers have enhanced fears of a downturn. This past week, the International Monetary Fund cited weaker consumer spending in slashing expectations for economic growth this year in the United States, from 2.9 percent to 2.3 percent. Avoiding recession will be “increasingly challenging,” the fund warned.
Orwellian lockdowns that have constrained business and life in general. The government expresses resolve in maintaining lockdowns, now affecting 247 million people in 31 cities that collectively produce $4.3 trillion in annual economic activity, according to a recent estimate from Nomura, the Japanese securities firm.
But the endurance of Beijing’s stance — its willingness to continue riding out the economic damage and public anger — constitutes one of the more consequential variables in a world brimming with uncertainty.
sanctions have restricted sales of Russia’s enormous stocks of oil and natural gas in an effort to pressure the country’s strongman leader, Vladimir V. Putin, to relent. The resulting hit to the global supply has sent energy prices soaring.
The price of a barrel of Brent crude oil rose by nearly a third in the first three months after the invasion, though recent weeks have seen a reversal on the assumption that weaker economic growth will translate into less demand.
major pipeline carrying gas from Russia to Germany cut the supply sharply last month, that heightened fears that Berlin could soon ration energy consumption. That would have a chilling effect on German industry just as it contends with supply chain problems and the loss of exports to China.
euro, which has surrendered more than 10 percent of its value against the dollar this year. That has increased the cost of Europe’s imports, another driver of inflation.
ports from the United States to Europe to China.
“Everyone following the economic situation right now, including central banks, we do not have a clear answer on how to deal with this situation,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Norway. “You have a lot of things going on at the same time.”
Understand Inflation and How It Impacts You
The most profound danger is bearing down on poor and middle-income countries, especially those grappling with large debt burdens, like Pakistan, Ghana and El Salvador.
As central banks have tightened credit in wealthy nations, they have spurred investors to abandon developing countries, where risks are greater, instead taking refuge in rock-solid assets like U.S. and German government bonds, now paying slightly higher rates of interest.
This exodus of cash has increased borrowing costs for countries from sub-Saharan Africa to South Asia. Their governments face pressure to cut spending as they send debt payments to creditors in New York, London and Beijing — even as poverty increases.
U.N. World Food Program declared this month.
Among the biggest variables that will determine what comes next is the one that started all the trouble — the pandemic.
The return of colder weather in northern countries could bring another wave of contagion, especially given the lopsided distribution of Covid vaccines, which has left much of humanity vulnerable, risking the emergence of new variants.
So long as Covid-19 remains a threat, it will discourage some people from working in offices and dining in nearby restaurants. It will dissuade some from getting on airplanes, sleeping in hotel rooms, or sitting in theaters.
Since the world was first seized by the public health catastrophe more than two years ago, it has been a truism that the ultimate threat to the economy is the pandemic itself. Even as policymakers now focus on inflation, malnutrition, recession and a war with no end in sight, that observation retains currency.
“We are still struggling with the pandemic,” said Ms. Haugland, the DNB Markets economist. “We cannot afford to just look away from that being a risk factor.”
Federal Reserve officials are turning a wary eye to Russia’s invasion of Ukraine, though several have signaled in recent days that geopolitical tensions are unlikely to keep them from pulling back their support for the U.S. economy at a time when the job market is booming and prices are climbing rapidly.
Stock indexes are swooning and the price of key commodities — including oil and gas — have risen sharply and could continue to rise as Russia, a major producer, responds to American and European sanctions.
That makes the invasion a complicated risk for the Fed: On one hand, its fallout is likely to further push up price inflation, which is already running at its fastest pace in 40 years. On the other, it could weigh on growth if stock prices continue to plummet and nervous consumers in Europe and the United States pull back from spending.
The magnitude of the potential economic hit is far from certain, and for now, central bank officials have signaled that they will remain on track to raise interest rates from near-zero in a series of increases starting next month, a policy path that will make borrowing money more expensive and cool down the economy.
invasion could disrupt the post-Cold War world order and warned that the jump in energy prices and fallout from sanctions “will complicate the ability of central banks on both sides of the Atlantic to engineer a soft landing from the pandemic inflation surge.”
Economists have been warning that a “soft landing” — in which central banks guide the economy onto a sustainable path without causing a recession — might be difficult to achieve at a time when prices have taken off and monetary policies across much of Europe and North America may need to readjust substantially.
“The shock of war adds to the enormous challenges facing central banks worldwide,” Isabel Schnabel, an executive board member at the European Central Bank, said during a Bank of England event on Thursday. She added that policymakers are monitoring the situation in Ukraine “very closely.”
Inflation is high around much of the world, and though it is slightly less pronounced in Europe, and E.C.B. policymakers are reacting more slowly to it than some of their global counterparts, recent high readings there have prompted some officials to edge toward policy changes.
dizzying spikes in prices for energy and food and could spook investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.
The cost of energy. Oil prices already are the highest since 2014, and they have risen as the conflict has escalated. Russia is the third-largest producer of oil, providing roughly one of every 10 barrels the global economy consumes.
Gas supplies. Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders have accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.
Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
Financial turmoil. Global banks are bracing for the effects of sanctions designed to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.
“The current situation is different from past episodes when geopolitical events led the Fed to delay tightening or ease because inflation risk has created a stronger and more urgent reason for the Fed to tighten today,” researchers at Goldman Sachs wrote in an analysis note.
Plus, with wages rising and consumers increasingly expecting high inflation in the coming years, the fact that the conflict has the potential to further elevate prices could strike the central bank as problematic.
“Further increases in commodity prices might be more worrisome than usual,” they wrote.
Some economists warned that the Russian invasion in some ways echoed the inflationary episode of the 1970s: Back then, price increases were already rapid, and a sharp oil price increase pushed inflation up further and made it stick around. The Arab oil embargo of 1973-74 and the Iranian revolution of 1979 both contributed to an oil supply shortage.
“There is something eerily reminiscent of the 1970s and the surge in energy prices associated with Russia’s invasion of the Ukraine,” Diane Swonk, chief economist at Grant Thornton, wrote on Twitter Thursday. “It couldn’t happen at a worse time as it is pouring fuel over an already kindled fire of inflation.”
Economists have released varying estimates of how much an oil price shock could bolster inflation in the coming months.
If oil increases to $120 per barrel by the end of February, past the $95 mark it hovered around last week, inflation as measured by the Consumer Price Index could climb close to 9 percent in the next couple of months, instead of a projected peak of a little below 8 percent, said Alan Detmeister, an economist at UBS who formerly led the prices and wages section at the Fed.
The Goldman researchers said that as a rule of thumb, a $10 per barrel increase in the price of oil would increase headline inflation in the United States by about a fifth of a percentage point, and lowers gross domestic product growth by just under 0.1 percentage point.
“The growth hit could be somewhat larger if geopolitical risk tightens financial conditions materially and increases uncertainty for businesses,” they wrote.
PARIS — The European Central Bank’s top task is to keep inflation at bay. But as the cost of everything from gas to food has soared to record highs, the bank’s employees are joining workers across Europe in demanding something rarely seen in recent years: a hefty wage increase.
“It seems like a paradox, but the E.C.B. isn’t protecting its own staff against inflation,” said Carlos Bowles, an economist at the central bank and vice president of IPSO, an employee trade union. Workers are pressing for a raise of at least 5 percent to keep up with a historic inflationary surge set off by the end of pandemic lockdowns. The bank says it won’t budge from a planned a 1.3 percent increase.
That simply won’t offset inflation’s pain, said Mr. Bowles, whose union represents 20 percent of the bank’s employees. “Workers shouldn’t have to take a hit when prices rise so much,” he said.
Inflation, relatively quiet for nearly a decade in Europe, has suddenly flared in labor contract talks as a run-up in prices that started in spring courses through the economy and everyday life.
reached 4.90 percent, a record high forthe eurozone.
Austrian metalworkers wrested a 3.6 percent pay raise for 2022. Irish employers said they expect to have to lift wages by at least 3 percent next year. Workers at Tesco supermarkets in Britain won a 5.5 percent raise after threatening to strike around Christmas. And in Germany, where the European Central Bank has its headquarters, the new government raised the minimum wage by a whopping 25 percent, to 12 euros (about $13.60) an hour.
fell for the first time in 10 years in the second quarter from the same period a year earlier, although economists say pandemic shutdowns and job furloughs make it hard to paint an accurate picture. In the decade before the pandemic, when inflation was low, wages in the euro area grew by an average of 1.9 percent a year, according to Eurostat.
The increases are likely to be debated this week at meetings of the European Central Bank and the Bank of England. E.C.B. policymakers have insisted for months that the spike in inflation is temporary, touched off by the reopening of the global economy, labor shortages in some industries and supply-chain bottlenecks that can’t last forever. Energy prices, which jumped in November a staggering 27.4 percent from a year ago, are also expected to cool.
interview in November with the German daily F.A.Z., adding that it was likely to start fading as soon as January.
In the United States, where the government on Friday reported that inflation jumped 6.8 percent in the year through November, the fastest pace in nearly 40 years, officials are not so sure. In congressional testimony last week, the Federal Reserve chair, Jerome H. Powell, stopped using the word “transitory” to describe how long high inflation would last. The Omicron variant of the coronavirus could worsen supply bottlenecks and push up inflation, he said.
In Europe, unions are also agitated after numerous companies reported bumper profits and dividends despite the pandemic. Companies listed on France’s CAC 40 stock index saw margins jump by an average of 35 percent in the first quarter of 2021, and half reported profits around 40 percent higher than the same period a year earlier.
raised in October by 2.2 percent.
Crucially, executives also agreed to return to the bargaining table in April if a continued upward climb in prices hurts employees.
At Sephora, the luxury cosmetics chain owned by LVMH Moët Hennessy Louis Vuitton, some unions are seeking an approximately 10 percent pay increase of €180 a month to make up for what they say is stagnant or low pay for employees in France, many of whom earn minimum wage or a couple hundred euros a month more.
€44.2 billion in the first nine months of 2021, up 11 percent from 2019, raised wages at Sephora by 0.5 percent this year and granted occasional work bonuses, said Jenny Urbina, a representative of the Confédération Générale du Travail, the union negotiating with the company.
Sephora has offered a €30 monthly increase for minimum wage workers, and was not replacing many people who quit, straining the remaining employees, she said.
“When we work for a wealthy group like LVMH no one should be earning so little,” said Ms. Urbina, who said she was hired at the minimum wage 18 years ago and now earns €1,819 a month before taxes. “Employees can’t live off of one-time bonuses,” she added. “We want a salary increase to make up for low pay.”
Sephora said in a statement that workers demanding higher wages were in a minority, and that “the question of the purchasing power of our employees has always been at the heart” of the company’s concerns.
At the European Central Bank, employees’ own worries about purchasing power have lingered despite the bank’s forecast that inflation will fade away.
A spokeswoman for the central bank said the 1.3 percent wage increase planned for 2022 is a calculation based on salaries paid at national central banks, and would not change.
But with inflation in Germany at 6 percent, the Frankfurt-based bank’s workers will take a big hit, Mr. Bowles said.
“It’s not in the mentality of E.C.B. staff to go on strike,” he said. “But even if you have a good salary, you don’t want to see it cut by 4 percent.”
Léontine Gallois contributed reporting from Paris.
Tesla was one of the worst-performing stocks in the market on Wednesday, tumbling more than 4 percent. The company had once positioned itself as a prominent supporter of cryptocurrencies, and in March, it announced that it would accept Bitcoin in exchange for cars, helping to set off a surge in the asset.
Last week, Elon Musk, the company’s chief executive, reversed that decision, citing concerns about the energy consumption needed to produce cryptocurrencies. That process, known as mining, involves a using computers to create new Bitcoin by having them solve complex computational problems.
The hard drive maker Seagate Technology — which has a stake in cryptocurrency company Ripple, the creator of the XRP currency — tumbled more than 2 percent. Shares of Seagate and Western Digital, another maker of hard drives, had been on a tear in recent days, as analysts spotlighted surging demand for its computer products, in part, from cryptocurrency miners. Western Digital was down nearly 3 percent.
Bitcoin wasn’t the only element moving the markets. Crude oil tumbled roughly 4 percent, on lingering concerns that the still-spreading coronavirus in India, as well as Thailand, Vietnam and Taiwan, could prompt new restrictions that could curtail economic activity.
The Stoxx Europe 600 index was 1.5 percent lower, while the FTSE 100 in Britain was down 1.3 percent. Stock markets in Asia ended the day mainly lower, with the Nikkei in Japan down by 1.3 percent.
Volatility in the stock markets lately has been driven by sentiment about inflation. Investors are nervous that a jump in prices —coming as global economies reopen and as the government continues to pump stimulus funds to spur growth — could push the Federal Reserve and other central banks to raise interest rates or take other measures to cool growth. That would be bad news for riskier investments like stocks.
The Fed and other central banks have said they see the recent increases as transitory caused partly by supply chain issues as economies revive from lockdowns, and that they have no plans to remove emergency support for the economy.
Federal Reserve policymakers will release the minutes from their April meeting on Wednesday.
European authorities will release data on Friday that is widely expected to show another economic downturn over the first three months of the year as the still-raging pandemic has prompted governments to extend lockdowns.
Coming a day after the United States disclosed that its economy expanded 1.6 percent over the same period — a robust 6.4 percent annualized rate — the expected European contraction presents a contrast of fortunes on opposite sides of the Atlantic.
Propelled by dramatic public expenditures to stimulate growth, as well as swift increases in vaccination rates, the United States — the world’s largest economy — expanded rapidly during the first months of 2021. At the same time, the 19 nations that share the euro currency were likely caught in the second part of a so-called double-dip recession, reflecting far less aggressive stimulus spending and a botched effort to secure vaccines.
But economic growth figures represent a snapshot of the past, and recent weeks have produced encouraging signs that Europe is on the mend. Even as Covid-19 spreads alarmingly in major economies like Germany and France, factories have revived production, while growing numbers of people are on the move in cities.
European Union’s recent deal to secure doses from Pfizer.
In depriving households of the opportunity to spend, the pandemic has yielded savings — money that may surge into businesses as fear of the virus fades.
Most economists and the European Central Bank expect the eurozone to expand at a blistering pace over the rest of 2021, yielding growth of more than 4 percent for the full year.
International Monetary Fund. That compares to 10 percent in Germany.
But Europe also began the crisis with far more comprehensive social safety net programs. While the United States directed cash to those set back by the pandemic, Europe limited a surge in unemployment.
“Europe has more insurance schemes,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Oslo. “You don’t fall as hard, but you don’t rebound that sharply either.”
U.S. Stocks Fall Broadly Ahead Of Key Fed Decision On Rates
Long-Term Mortgage Rates Now At Highest Point Since 2008
