Could Europe end up with a worse inflation problem than America? – The Economist
by News Feed Editor | Jan 19, 2023 | Financial
Inflation is coming down. On both sides of the Atlantic, falling energy costs are provoking sighs of relief. Price-watchers are now focused on core inflation, a measure that strips out volatile food and energy prices, and is usually much slower to rise—and more difficult to bring down. Since October, core inflation in the euro zone has been higher than in America. Could Europeans end up with a worse inflation problem than their transatlantic peers? Listen to this story. Enjoy more audio and podcasts on iOS or Android.Your browser does not support the element.Listen to this storySave time by listening to our audio articles as you multitaskOKEvery economist knows Milton Friedman's dictum that "inflation is always and everywhere a monetary phenomenon." But the Nobel-prizewinner's words do not seem to capture the current bout of inflation, where post-pandemic supply disruptions, fiscal splurges, an energy shock and labour shortages have created a near-perfect storm causing prices to soar. How fast inflation comes down may therefore depend not only on what central banks do but on how these factors—the disruptions, energy shock and wage rises—affect economies on either side of the Atlantic.Alongside these surprises, there has been extraordinary tumult in the basic operations of rich-world economies. Covid-19 altered how people work, what they consume and where they live, and did so in short order. Removing pandemic restrictions then led to a surge in demand for travel, nights out and treats. On top of this, governments in America and Europe have decided to subsidise green technologies on an unprecedented scale. Capital, production inputs and workers need to move to parts of the economy that are growing and away from those that are shrinking. Until they do, the economy cannot produce enough to meet demand.Yet moving jobs or investing in new plants or software takes time. A boom accelerates the process. Recent work by Rüdiger Bachmann of the University of Notre Dame and colleagues shows that workers in Germany are more likely to change jobs when demand is high than during recessions. Another study, using American data, suggests that moving to a growing firm increases pay for the job-switching worker substantially. The current shifts in the economy are therefore likely to produce some inflation—and that may be desirab …