As the cost of living rises around the world, governments are not leaving it up to their central banks to contain inflation. They react in other ways as well.
There is a long history of other policies aimed at reducing prices. Many of them – as well as new ones – are being reused, from US President Joe Biden’s Supply Chain Task Force and European energy subsidies to Argentina’s general controls.
Two fundamental rules of orthodox economics over the past decades have been that prices must be set in free markets, and that managing inflation is a job for monetary policy. But this year’s pandemic price pressures – following record stimulus measures by governments and central banks that have supported demand around the world – darken the problem.
On the one hand, it is not clear how increasing borrowing costs – as many countries are already doing – can remedy the causes of pandemic inflation on the supply side of economies, such as arrears. shipping or material and labor shortages.
On the other hand, from the point of view of politicians, the timing is staggered. Economists generally estimate that it takes at least six months for the tightening of monetary policy to take effect by dampening demand. So even if the Federal Reserve, for example, raises interest rates at the end of 2022 – with an impact felt sometime in 2023 – that does not relieve the pressure on politicians like Biden to do something. thing earlier. US polls in UK. showed that voters are worried about soaring prices.
More generally, the pandemic has reignited the debate over the role of governments in the economy – and inflation is part of that argument. The prevailing view is that leaving the markets alone is the most efficient way to provide inexpensive products. But this year’s supply chain crisis has raised the question of whether the quest for efficiency and low prices has come at the expense – or even national security.
Soaring energy prices are one of the main 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 the leaders of the Group of 20.
France provides a single subsidy of 100 euros for low income. Spain has pledged to take action to cap household bills and levy a one-off tax on some energy suppliers, though it has refrained from imposing a broader charge. Kenya uses a stabilization fund to lower prices at the pump – and also cuts the gasoline tax which raises money for the fund.
Such subsidies are not seen by economists as anti-inflationary – they don’t reduce costs, they just distribute them differently. But they mitigate the immediate rise in living expenses, which inflation represents for most non-economists.
In Latin America, a particularly sensitive price for politicians is liquefied petroleum gas, as the cans of it are used for cooking, especially by poorer households.
Mexican President AndrÃ©s Manuel LÃ³pez Obrador is setting up a public distribution company that will sell fuel “at a fair price”, and his government has imposed price caps in some areas. The Brazilian Senate has approved a grant program to help some 11 million families buy cooking gas, funded in part by dividends received from state oil giant Petrobras.
âEspecially in low-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 increase the supply. Nigeria’s central bank is supporting farmers with cheap loans, so they can increase their production.
Russia, the world’s largest wheat exporter, is also looking to improve the productivity of its farms, but recognizes that this will take time, and it also restricts overseas sales to ensure there is enough supply. cereals for the domestic market. The measures include an export duty which is adjusted weekly.
This illustrates the scathing element of some cost of living policies. When food or energy-exporting countries take steps to make these products affordable at home, this can limit supplies – and raise 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 developing a network of agricultural cooperative stores and has tasked officials to investigate price gouging in wholesale markets. It has also removed import duties on grains and lentils, and is working on an early weather warning system to detect potential supply shocks.
Argentina has a long history of unorthodox policies to curb prices – and it has always had one of the highest inflation rates in the world, suggesting they haven’t worked.
Yet President Alberto FernÃ¡ndez has implemented some of the most drastic measures to reduce the cost of living. This month, he announced a price freeze on more than 1,400 household items until after Christmas, following talks with industry on a price agreement broken off. He also ordered companies to produce at full capacity.
Biden has been fighting for months to remove the bottlenecks that drive up consumer prices and threaten Christmas shortages, even though his administration has limited powers to address them.
His White House has set up a supply chain task force. It aims to push congested ports to work longer, get more trucker’s licenses to overcome a labor shortage, and negotiate deals with companies like FedEx Corp. to extend their delivery schedules.
China, where central planning plays a more important role, is not currently suffering from high consumer inflation – but it is concerned about spikes in producer prices, especially for coal, which threaten to worsen electricity shortages. The largest planning agency says it is evaluating intervention in a market that “has completely deviated from the fundamentals of supply and demand.” The authorities have also released stocks of certain metals to amortize costs.
European leaders have a longer-term plan for another key driver of pandemic inflation: semiconductors. They want to make more crisps at home. “There is no alternative to state intervention” to achieve this goal, Italian Prime Minister Mario Draghi said last week.
by Ben Holland, Bloomberg