The Two Inflation Crises

Why Europe’s inflation crisis is different from America’s.

Political and economic crises typically have multiple causes. But many right now are driven by one main factor: the rising cost of living.

In Britain, Prime Minister Liz Truss is facing calls to resign after just six weeks in office over a now-abandoned tax cut plan that experts warned would worsen inflation, if not wreak economic havoc. Europe is bracing for skyrocketing energy costs this winter. In the U.S., the Federal Reserve is considering more aggressive steps to bring down price increases, but its moves could also cause a recession, as The Times reported yesterday.

This chart by my colleague Ashley Wu shows how quickly prices have risen across many of the world’s advanced democracies. Officials generally aim to keep the rate of inflation around 2 percent — enough to keep the economy growing yet preserve stability in prices. Many of the countries are at least four times above that pace:

Chart shows annual change in total Consumer Price Index each month through August 2022. | Source: O.E.C.D.

So what happened? It helps to think of inflation as two related crises instead of one. In the first, global disruptions from the pandemic and Russia’s invasion of Ukraine prompted inflation to spike around the world. In the second, some countries — particularly the U.S. — also made inflation worse for themselves through domestic policy decisions. In today’s newsletter, I’ll explain both.

From 2020 to early 2022, Covid largely explained the trends on the chart. The pandemic and its fallout created a supply shortage (factories closed and logistics chains sputtered) and a spike in demand (for purchases like home furniture and airfares). That imbalance prompted price increases.

The chart’s trends show a change near the beginning of this year. From last year until early 2022, prices in the U.S. rose more quickly than in the other countries. But the E.U. and Britain are now ahead, as data released today demonstrates. (The outlier is Japan, which has dealt with a stagnating economy and deflation for decades.)

Europe began outpacing the U.S. when the war in Ukraine created its own disruptions. Russia’s invasion shut down Ukraine — one of the world’s breadbaskets and a major exporter of grain — and raised food prices. And Western sanctions in response to the war cut off Europe from Russian oil and gas, on which the continent relied heavily. So worldwide energy prices went up, too.

As this second chart by Ashley shows, Europe took the hardest hit. The war affected energy costs in other parts of the world, but countries less dependent on Russian oil and gas adapted more quickly:

Chart shows annual change in energy prices each month through August 2022. | Source: O.E.C.D.

Europe’s challenge now is finding alternative energy sources. Building up the infrastructure, after dedicating pipelines and terminals to Russian oil and gas, will take time.

Even countries with bigger buffers from the supply shock are taking steps to address energy prices. The Department of Energy is planning to release 15 million more barrels of oil from strategic reserves.

Government responses to the global crises also influenced inflation, at times making it worse than it otherwise would have been.

Policymakers’ initial instinct during the pandemic was economic preservation. To prevent Covid from setting off a deep recession, they enacted relief measures. In some cases, they might have gone too far: The point of stimulus packages is to elevate spending and demand, keeping the economy afloat. But if supply can’t keep up with the new demand, prices will rise.

Once they did, central banks were also slow to respond — believing that the inflation would subside as the impact of global catastrophes like the pandemic faded. So inflation increased unchecked.

The U.S. suffered from both problems. America spent among the most of any country in the world on economic relief, likely leading to too much demand and then worse inflation. And for much of 2021, the Federal Reserve viewed rising prices as a temporary phenomenon; it didn’t acknowledge that inflation was enduring until late last year.

That combination of overstimulus and central bank inaction helps explain why the U.S. had the highest inflation rate among its peers until Russia’s invasion of Ukraine.

If it weren’t for the war, the U.S. could still be worse off than the others. America still has a higher core inflation rate, which excludes food and energy prices, than many of its peers — indicating it has deeper problems than the global events that are primarily driving up food and energy costs. The labor market in particular remains hot, with an unusually high number of job openings for each unemployed worker. These are the problems that the Fed is trying to address without causing a deep recession (as I explained in this newsletter).

In simple terms: Inflation is the big problem. But in Europe, the causes and solutions are related to supply. And in the U.S., they are more about demand.

Politics

Drew Angerer/Getty Images
  • An analyst who was behind a dossier of unproven rumors about Donald Trump and Russia was acquitted of lying to the F.B.I., another blow to a Trump-era prosecutor.

  • What does “abortion” mean? How legislators and health care providers define the word has consequences for access.

  • If Democrats add to their control of Congress, President Biden said his first bill would codify abortion rights nationwide.

  • Senator Marco Rubio of Florida and his Democratic challenger, Representative Val Demings, clashed on guns and abortion in a debate. Here are takeaways.

  • “They forgot about us.” While the Biden administration prioritizes resettling people fleeing Ukraine and Afghanistan, other refugees have been waiting years.

War in Ukraine

Finbarr O’Reilly for The New York Times

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Angelica Alzona

If you’re traveling for the holidays, buy your airfare as soon as possible. “The best time to have booked those Thanksgiving and Christmas flights was June and July,” says Scott Keyes, the founder of Scott’s Cheap Flights. “And the second best is basically now.”

That’s one of the tips from The Times’s new guide to holiday travel. Domestic travel will be particularly pricey this year — it costs more to book Thanksgiving flights to Cedar Rapids, Iowa, than to go to Lisbon around the same time. But there are ways to save money. The guide includes some of the cheapest days to fly, many of which fall on Mondays.

What to Cook

Craig Lee for The New York Times

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Now Time to Play

The pangram from yesterday’s Spelling Bee was flatbed. Here is today’s puzzle.

Here’s today’s Mini Crossword, and a clue: Wake up (five letters).

And here’s today’s Wordle. After, use our bot to get better.


Thanks for spending part of your morning with The Times. See you tomorrow. — German

P.S. The Dow suffered its largest ever single-day percentage drop 35 years ago today in the Black Monday global stock crash.

Here’s today’s front page.

The Daily” is about the Los Angeles City Council. On “The Argument,” what is political polling good for?

Matthew Cullen, Lauren Hard, Lauren Jackson, Claire Moses, Ian Prasad Philbrick, Tom Wright-Piersanti and Ashley Wu contributed to The Morning. You can reach the team at [email protected].

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