Inflation's Stubborn Grip: G-7 Economies Grapple with a Post-Pandemic Dilemma
The world's leading economies, the G-7, are facing a tricky situation: stubbornly high inflation amidst slowing growth, a recipe for what economists call stagflation. This unsettling combination is causing central banks to walk a tightrope, balancing the need to control prices while avoiding further economic slowdown.
Central Banks in a Tight Spot
Traditionally, central banks aim for a 2% inflation target. However, only Canada and France have managed to stay below this threshold in the past year, largely due to their weaker economic performance. The eurozone, Japan, and the UK are all exceeding this target, with Japan and the UK averaging above 3%.
Divergent Responses, Uncertain Outcomes
Interestingly, despite this persistent inflation, only the US and Canada opted to cut interest rates in September, citing slowing economies and labor market uncertainty. The overnight index swap (OIS) market predicts further rate cuts from the Federal Reserve and the Bank of Canada by year-end.
But here's where it gets controversial: other G-7 central banks are taking a wait-and-see approach, particularly regarding the impact of US tariffs. The OIS market sees little chance of further rate cuts in the UK and Japan, where inflation remains above target. This is particularly striking in the UK, where unemployment has risen to 4.7% and GDP growth is sluggish at 1.4%.
Japan's New Direction?
Japan, while avoiding recession, is also experiencing sluggish growth. The appointment of Sanae Takaichi as prime minister, with her focus on fiscal expansion and looser monetary policy, has led investors to scale back expectations of a rate hike.
Europe's Delicate Balance
In the eurozone, France's inflation is relatively low at 1.1%, while Germany's sits at 2.4%. Despite France's high unemployment (7.3%) and Germany's manufacturing sector struggling with the impact of China's economic slowdown, the OIS market anticipates the European Central Bank to pause rate cuts. This could strengthen the euro and potentially moderate inflation across Europe.
A Global Challenge
With most G-7 nations navigating a post-pandemic shift in interest rate policies, conditions are ripe for higher inflation across advanced economies. This complex situation demands careful navigation from central banks, as they strive to balance price stability with economic growth.
Food for Thought:
Is the focus on 2% inflation still appropriate in today's economic landscape? Are central banks equipped to handle the challenges of stagflation? Share your thoughts in the comments below.
About Joe Brusuelas
Joe Brusuelas, Chief Economist at RSM US LLP, is a leading voice on issues affecting midsize companies globally. With over 20 years of experience, he provides insightful analysis on monetary policy, labor markets, and global economic trends. Follow him on Twitter @JoeBrusuelas for his latest insights. Subscribe to his daily Market Minute commentary at https://realeconomy.rsmus.com/subscribe-to-market-minute/ for a deeper dive into the economic forces shaping our world.
