From Melbourne to Manchester to Miami, people are struggling under the weight of high prices for the things they buy every day.
The worst inflation many advanced economies have seen in decades underscores the global forces driving up prices, namely the disruptions triggered by the coronavirus pandemic.
The stakes are high for policymakers around the world who face similar problems. To try to control inflation, central bankers quickly raised interest rates, trying to slow down their economies in hopes of cooling prices.
If they fail to control inflation, it could result in a destabilizing period of spiraling prices. Higher and less predictable inflation would put pressure on families and businesses and make it harder to plan for the future.
But if economic policymakers react too aggressively – and all at once – it could cripple global economic growth to a painful degree. That could raise the risk of a major recession that shuts down businesses and puts people out of work. Given the potential cost, policymakers don’t want to overdo it, damaging their economies more than necessary to lower inflation.
Many central banks approach these trade-offs similarly: They focus on combating stubbornly high inflation. Officials fear that if they let inflation go on too long, it could take root and prove even more painful to stamp out.
The leaders of major central banks in North America, Europe and elsewhere have said recently that they expect to continue raising rates as inflation moderates but remains well above their typical target rates — which are often around 2 percent.
Officials at the US Federal Reserve raised their policy rate to just above 5 percent from near zero in March 2022, and they expect to raise it twice in 2023, to just above 5.5 percent. Policymakers at the European Central Bank, which sets policy for the 20 countries that use the euro, are also expected to continue raising rates, which have reached their highest level since 2001. The Bank of England recently surprised investors by raising rates more than expected with its 13- a successive increase.
Inflation rose sharply in the US in 2021 but fell faster than in many parts of Europe. That’s partly because Europe has greater exposure to the effects of the Russian invasion of Ukraine, which has sharply raised food and energy prices.
But stripping away those volatile prices, so-called core inflation looks stubborn across many countries. That underscores the common problem facing policymakers: slow prices for services are climbing much faster than before the pandemic.
Prices for labor-intensive services such as medical care and education tend to track wage gains and the strength of the general economy. In short, they are the kind of price increases that central banks can do something about, raising rates to slow borrowing, curb spending and ultimately cool the economy.
In a recent meeting of central bankers, Jerome H. Powell, the chairman of the Fed, said that for inflation in the service sector, such as hotels, restaurants and banks, “we still don’t see much progress.”
Chart sources: FactSet (policy rates); Organization for Economic Cooperation and Development (inflation rates).
The map includes OECD members and selected major economies. The line charts show the most recent central bank policy target rates, and year-on-year changes in consumer price indices compiled by the OECD in May. For Australia, the change in consumer prices is for the first quarter of the year.
Eshe Nelson contributed reporting.