The difference in the current inflation cycle

Economic experts also predict that this somewhat special process of reducing inflation will continue in Western economies this year, paving the way for policymakers to start lowering interest rates.

In a recent survey by economic research firm Consensus Economics, analysts forecast inflation will fall from a multi-decade peak set about two years ago to 2% this year in most countries. most developed economies, including: US, Germany, France, UK, Italy and Eurozone.


History shows that victories in the fight against inflation often come with significant losses, because tightening monetary policy to slow down price increases can easily push economies into recession and exchange rates. Unemployment rate increased. For example, unemployment rates in the UK and US doubled in the 1980s as interest rates rose sharply to counter rising inflation caused by the oil price shock.

However, the world’s current inflation cycle has differences. Economist Michael Saunders of the economic research company Oxford Economics emphasized that inflation in the US and Eurozone will decrease to the target of 2% but will only cause unemployment rates in these two economies to increase slightly. “Pure disinflation, where inflation falls sustainably toward target without causing unemployment to rise sharply, has become the main scenario,” Mr. Saunders said.

Over the past two years, inflation in the US and Europe has more than halved. In the Eurozone, February consumer prices rose 2.6% year-on-year, from an all-time high of 10.6% set in 2022. Inflation in the UK has eased from a peak of 11.1%. about 4%; and in the US from 9.1% to 3.2%.

However, unemployment is at a record low in the Eurozone and is just 3.9% in the US – not far from the 50-year low of 3.6% recorded in 2023. In the survey by Consensus Economics, analysts forecast the average unemployment rate in the US this year to be 4%. In the updated economic forecast after the monetary policy meeting held on March 19 and 20, the US Federal Reserve (Fed) also predicted that the unemployment level at the end of this year would be 4%.

In the UK, the unemployment rate surveyed by Consensus Economics is only expected to rise to 4.4% this year and 4.5% in 2025, from a near 52-year low of 3.9% today.

“The trend of reducing inflation while maintaining full employment is rare in modern history. I see that the UK is not the only economy that is experiencing a process of reducing inflation while still preserving jobs,” Bank of England (BOE) Governor Andrew Bailey said recently.

Inflation falling but unemployment not increasing sharply also means a “soft landing” scenario for the US economy. In the latest economic forecast, Fed monetary policymakers forecast that US gross domestic product (GDP) will grow 2.1% this year, one and a half times higher than forecast. The 1.4% increase given in the update last December was also higher than the long-term growth potential.

In addition, the Fed’s confidence in the downward trend, albeit somewhat slowing, of inflation is also reflected in the fact that Fed officials maintain their forecast that there will be three interest rate cuts this year with each reduction period is 0.25 percentage points.

“Interest rates have risen quite rapidly, and some have feared that the price of reducing inflation will be persistently high unemployment,” said Ms. Adriana Kugler, a member of the Fed Board of Governors. But over the past year or so, we have seen inflation fall much lower, falling faster than in any period since 1980, while the unemployment rate remains at one of the lowest levels since from the 1960s to the present”.

Many economists, including Mr. Bailey and Ms. Kugler, believe that the phenomenon of decreasing inflation without increasing unemployment is due to the nature of the recent increase in inflation. Inflation has soared due to global supply shocks such as the Russia-Ukraine conflict and the Covid-19 pandemic. “The period of high inflation in 2021-2023 in developed economies is different from the past, because it mainly reflects supply shocks instead of a sharp increase in aggregate demand,” Mr. Saunders emphasized. in an interview with the Financial Times newspaper.


Capital Economics chief economist Jennifer McKeown said high wage growth, which monetary policymakers are watching closely, is seen as a key source of upward pressure on prices. – is a consequence of higher inflation expectations. Meanwhile, this expectation comes from high energy prices and post-pandemic labor scarcity in some fields. Ms. McKeown said that wage increases for this reason are now slowing down, even if the unemployment rate has not increased, because the rate of price increase and inflation expectations have returned to a normal state when the distortions pandemic-related balance returns.

Economic experts also believe that the speed of response by central banks is also a factor in preventing high inflation from becoming persistent. “The reason the supply shocks of the 1970s and 1980s took root is that central banks then failed to understand the role of inflation expectations and cost-of-living adjustments in many labor contracts.” , said chief economist Mark Zandi of Moody’s Analytics.

Mr. Zandi added that the current decline in inflation is mainly due to the economic effects of the pandemic and the easing of the Russia-Ukraine conflict. With the impact of those shocks quickly subsiding, freight transit times are now back to pre-pandemic levels and freight costs are a fraction of what they were in 2021. Gas prices Wholesale prices in Europe and global agricultural prices have fallen to nearly the level of 2021 – the time before the prices of these goods skyrocketed due to the war…

The content of the article was published in Vietnam Economic Journal No. 13-2024 published on March 25, 2024. Dear readers, we invite you to read here This: Kinh-te-viet-nam

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