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Interest Rates Aren’t the Only Weapon in Global Inflation Fight

As the cost of living surges all over the world, governments aren’t leaving the job of containing inflation to their central banks. They’re responding in other ways too.    There’s a long history of other policies aimed at tamping down prices. Many of them -– along with some new ones –- are being wheeled out again now, from U.S. President Joe Biden’s supply-chain task force and Europe’s energy subsidies to Argentina’s across-the-board controls.  

Two bedrock rules of orthodox economics in recent decades have been that prices should be set on free markets, and that managing inflation is a job for monetary policy. But this year’s pandemic price pressures -- following record stimulus by governments and central banks that’s propped up demand all over the world -- are clouding the issue.

For one thing, it’s not clear how raising borrowing costs –- as many countries are already doing -- can address causes of pandemic inflation on the supply side of economies, like shipping backlogs or shortages of materials and labor.

For another, from politicians’ point of view, the timing is off. Economists generally reckon it takes a minimum six months for tighter monetary policy to take effect by curbing demand. So even if the Federal Reserve, say, raises interest rates in late 2022 –- with an impact felt sometime in 2023 -– that doesn’t relieve pressure on politicians like Biden to do something sooner. Polls from the U.S. to the U.K. have shown voters are getting worried about soaring prices.

More broadly, the pandemic has revived debate about the role of governments in the economy -- and inflation is part of that argument. The prevailing view has been that leaving markets alone is the most efficient way to deliver cheap stuff. But this year’s supply-chain crisis has raised questions about whether the quest for efficiency and low prices has come at the expense of stability – or even national security.

Energy Subsidies
Soaring energy prices are one of the biggest components of pandemic inflation, and governments are stepping in to cushion the blow. The issue is likely to feature prominently at this weekend’s meeting of Group of 20 leaders.

France plans a one-time, 100-euro subsidy for low earners. Spain has promised action to cap household bills and is levying a windfall tax on some energy providers, though it backed away from imposing a wider charge. Kenya is using a stabilization fund to lower pump prices –- and also reducing the gasoline tax that collects money for the fund.

Subsidies like these aren’t viewed by economists as anti-inflationary –- they don’t curb costs, they just share them out differently. But they do blunt the immediate rise in living expenses, which is what inflation amounts to for most non-economists.

In Latin America, one price that’s particularly sensitive for politicians is liquefied petroleum gas, because canisters of it are used for cooking, especially by poorer households.

Mexican President Andres Manuel Lopez Obrador is setting up a state-owned distribution company that will sell the fuel “at a fair price,” and his government imposed price caps in some regions. Brazil’s Senate approved a subsidy program to help some 11 million families buy cooking gas, partly funded by dividends received from state oil giant Petrobras.

Food Prices

Especially in lower-income countries, rising food prices can trigger a social crisis -- and this year has seen the fastest increase in a decade.

Some countries are trying to boost supply. Nigeria’s central bank is supporting farmers with cheap loans, so they can increase output.

Russia, the world’s top wheat exporter, is seeking to improve productivity at its farms too -– but it acknowledges that will take time, and it’s also curbing sales abroad to ensure there’s enough of the grain for the domestic market. Measures include an export duty which is adjusted every week.

That illustrates the whack-a-mole element in some cost-of-living policies. When countries that export food or energy take steps to make those products affordable at home, it can limit supplies –- and boost prices -– elsewhere. Argentina’s ban on beef exports earlier this year is another example.

Other governments have focused on how food is sold. Turkey is expanding a network of farm-cooperative stores and has tasked officials with investigating price-gouging at wholesale markets. It’s also removed import duties on grains and lentils, and is working on an early weather-warning system to spot potential supply shocks.

Price Controls
Argentina has a long history of unorthodox policies to rein in prices –- and it’s consistently had one of the world’s highest inflation rates, suggesting they haven’t worked.

Still, President Alberto Fernandez has implemented some of the most drastic measures to keep living costs down. This month he announced a price freeze for more than 1,400 household items until after Christmas, following a breakdown in talks with industry on a pricing accord. He’s also ordered companies to produce at full capacity.

Supply Chains
Biden has been battling for months to smooth out bottlenecks that are pushing consumer prices up and threatening Christmas shortages, even though his administration has limited powers to address them.

His White House has set up a supply-chain task force. It’s sought to push logjammed ports into working longer hours, get more truck-driver licenses issued to overcome a labor squeeze, and broker agreements for companies like FedEx Corp. to expand their delivery schedules.

China, where central planning plays a bigger role, isn’t suffering high consumer inflation right now – but it’s concerned by spikes in some producer prices, especially for coal, which threatens to worsen power shortages. The top planning agency says it’s weighing intervention in a market that “has completely deviated from the fundamentals of supply and demand.” Authorities also released stockpiles of some metals to damp costs.  

Europe’s rulers have a longer-term plan for another key driver of pandemic inflation: semiconductors. They want to make more chips at home. “There are no alternatives to state intervention” if that goal is to be met, Italian Prime Minister Mario Draghi said last week.

©2021 Bloomberg L.P.



Nov 1, 2021 11:48
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