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Why Inflation Persists

Contrary to what many commentators would like to think, high inflation today is a macroeconomic phenomenon, resulting from too much money chasing too few goods and services. Worse, there are many reasons to worry that it will prove to be more persistent than many market participants have acknowledged.

BERLIN – Inflation is back, and it is demonstrating its usual tenacity. In the United States, the inflation rate rose from 1.2% in 2020 to 4.7% in 2021 and 8.1% in 2022. The forecast for 2023 is 3.5%, but recent figures have shown a disappointingly modest decline. As of February 2023, the US annual inflation rate was 6%, but core inflation (excluding volatile energy and food prices) had increased by 0.5% and remained high, at 5.5%.

Inflation in the eurozone is demonstrating similar persistence. The annual rate increased from 0.3% in 2020 to 2.6% in 2021 and 8.4% in 2022. And while inflation is expected to decline to 5.6% in 2023, recent figures, like in the US, have been disappointing. In February, annual inflation decreased only slightly, to 8.5% (from 8.6% in January), while core inflation increased to 5.6% (from 5.3% in January).

Far from being confined to the US and Europe, high inflation is a global phenomenon, with countries like Turkey and Argentina reporting record-breaking rates above70%. Indeed, among large economies, only China and Japan have managed to maintain price stability. It’s a pattern that raises anew old questions. What causes inflation, and what should policymakers do to prevent it from becoming endemic?