Over the past year, companies around the world began raising prices at a pace not seen in decades. Among the major economies, one country was hit hardest – the United States.
According to the Organization for Economic Co-operation and Development (OECD), prices rose at an annual rate of 4.7% last year – faster than in any other country in the Group of Seven (G7) advanced economies. In the UK, for example, inflation was just 2.5%.
And in May, when US inflation hit 8.6%, the country stayed on top – although UK data for the month is still pending.
Many of the drivers of inflation over the past year – like Covid supply disruptions and higher food prices after severe storms and droughts hit crops – weren’t unique to the US.
The reason why the US fared worse? In two words – high demand.
This has been spurred by the massive $5 trillion (£4.1 trillion) in spending approved by the US government to protect homes and businesses from the economic shock of the pandemic.
By cushioning family finances, the aid — which included direct checks to households — helped people continue shopping.
Goods like furniture, cars and electronics saw orders surge as shoppers diverted money they would otherwise have spent on restaurants and travel.
And when unusually high demand collided with supply problems due to Covid, companies hiked prices.
A recent study by the Federal Reserve Bank of San Francisco concluded that pandemic relief packages likely contributed to 3 percentage points of the rise in inflation by the end of 2021 – a factor that largely explains why US inflation has outperformed the rest of the US has world.
Oscar Jorda, senior policy adviser at the bank and one of the people who worked on the study, cautioned against reading too much into the exact percentages, but said the big picture is clear.
“These programs … have been a significant injection of cash into consumer pockets at a time when the industry may not have been quite ready to respond to rising demand,” he said in a May interview. They “signified a big surge of what I would call demand surge inflation.”
The risks that the packages would fuel inflation were raised before they were passed, notably by Harvard economist Larry Summers, a longtime Democratic Party policy adviser, as well as some Republicans.
But others, including the head of the Federal Reserve, have argued that price hikes would be “temporary” and taper off as Covid-related supply chain problems abate.
The Fed — which launched its own stimulus policies early in the pandemic — has been slow to respond to the hikes, even as inflation expectations across the US began to shift, says economist Ricardo Reis, a professor at the London School of Economics.
“That [shift in expectations] which temporarily became too persistent, and again the Fed was slow to respond.”
With US households bolstered by the stimulus checks, rising prices last year were not widely perceived as a cost-of-living crisis, although wage growth lagged behind.
But when the savings are spent, that changes, creating a serious political problem for US President Joe Biden, whom Republicans blame for the price hikes.
Mr. Biden, in turn, has pointed the finger at the war in Ukraine, which has hit oil supplies and exports of commodities like wheat, driving up prices and spreading pain around the world.
In the euro zone, prices rose at an 8.1% annual rate in May, led by countries close to Russia and dependent on its oil and gas, such as Estonia, where prices rose 20.1%.
In Britain, which is also heavily dependent on food and energy imports, inflation hit 7.8% in April, just behind the US among advanced economies after a price cap to limit energy bills was raised, the OECD said.
UK government consumer price figures, which exclude a measure of housing costs included in the OECD figure, showed an even faster rise of 9%.
Even Japan – which has struggled to keep inflation rates above zero – saw prices rise 2.5% in April.
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The OECD expects inflation to peak this year, averaging 5.5% in advanced economies and 8.5% in all 38 countries in the organization before falling back in 2023.
Prof Reis said he was heartened by the steps taken by the Federal Reserve, Bank of England and others to address the problem, including raising interest rates.
By making borrowing more expensive, such measures help to cool household and business demand and ease price pressures.
“I hope – but this is a little more uncertain – that this can happen without triggering a recession,” he said, adding that a return to the typical 2 percent target is unlikely. “That’s the big question.”
In the short term, interest rate hikes can only contribute to economic uncertainty – particularly in smaller countries, which are vulnerable to the sudden shifts in cash flows and exchange rate fluctuations often triggered by interest rate hikes.
Even in the largest economies, policymakers are scrambling to find ways to offset the cost of inflation for households hit by the skyrocketing cost of living.
The UK government recently announced a £15 billion bailout funded by an unexpected tax on oil and gas companies to help with rising energy bills.
Some countries in Europe, like Spain and Portugal, have introduced price caps on gas — the kind of response economists generally advise against, as caps tend to keep demand high by subsidizing consumption.
In the US, Mr Biden has released unprecedented amounts of oil from national stockpiles to try to bring down gasoline prices — outside of the grocery store, the most immediate pain point.
But as the war in Ukraine brings supply problems to the fore, the power of politicians – and central banks – is limited, analysts said.
“In the long term, they can do a lot of things by investing in various energy transition measures and things like that,” says Jorda. “But there really isn’t much that can be done in the short term.”
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