How the US managed to be the country that faster reduced the worst inflation of the last 40 years
It went down as fast as it went up.
After reaching its highest level in four decades, inflation in the United States fell in the last year from a staggering 9.1% to 3% in June.
Compared with the other richest countries in the world that are part of the Group of Seven (Germany, the United Kingdom, France, Italy, Canada and Japan), the US is the economy where the cost of living fell the fastest after having registered an all-time high.
“Part of the explanation for the relative success of the US in reducing inflation is the role of energy prices,” says Wendy Edelberg, director of The Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution think tank.
The country has been exposed to the fallout from the war in Ukraine in a different way than European nations, where the energy hit was much deeper given the close reliance on Russian supplies.
It seems that the world's largest economy managed to control inflationary pressures quite well, but in reality, says the economist, It has been a much more complex path than it seems.
"Until recently we were quite frustrated and worried," explains Edelberg in a dialogue with BBC Mundo, especially due to the difficulties in lowering core or underlying inflation, that is, excluding the cost of energy and food.
"Now it looks more promising," adds.
The increase in interest rates
In the United States there was a gigantic increase in the demand for goods accompanied by a rise in the price of products, "as if it were Christmas every week," says the expert.
Recently, however, that demand has cooled, in what could be the downward curve of the roller coaster.
And this has a lot to do with the monetary policy of the US Federal Reserve (the Fed), equivalent to a central bank, which embarked on a successive deep rise in interest rates to control the escalation of prices.
The Fed raised interest rates “in a way unusually aggressive in controlling inflationsays David Wilcox, a senior economist at the Peterson Institute for International Economics and Bloomberg Economics.
That made borrowing to buy a house or a car, or get financing for a new investment project, much more expensive, acting as a kind of brake on spending to prevent the inflationary spiral from continuing to grow.
If the horse runs too fast, the central bank throws down the reins to try to avoid debauchery, a policy that has been applied in many latitudes at the same time, including Latin America.
A wider range of products
One factor that has contributed to the decrease in the high cost of living in the US is the normalization of the supply of commercially available goods, after the ravages caused by the covid pandemic, Wilcox told BBC Mundo.
The serious problems with the supply chains of international trade, which generated a “container crisis”, with shortages of some products and astronomical shipping costs, began to be solved.
Thus, a greater supply of goods managed to lower inflationary pressures and alleviate the commercial chaos derived from the health crisis.
But when things were looking up, war broke out in Ukraine in February 2022 and a new challenge added fuel to the inflationary fire.
It worked in favor of the United States to have less energy dependence on Russia, and although inflation skyrocketed months after the war began, it also fell rapidly, to the extent that the government controlled spending and the Fed stepped on the brake.
However, the waters are not completely calm.
“I don't think we have completely returned to the typical dynamics of inflation and the economy”says the economist.
Will the recession hit the United States?
Economic predictions pointed out that with the historic increase in interest rates to control inflation, the economy had to suffer.
Typically, higher rates affect economic growth and increase unemployment.
Paradoxically, that has not yet happened in the United States.
Employment remains strong and a recession is not just around the corner for now.
This paradox remains an unsolved mystery for economists.
“This story isn't over, it's like a TV series we've only seen the first season of,” says Wilcox. "We don't know what the ending the writer has planned."
And it is that a labor market with such good health is something very strange in the midst of the current circumstances.
According to Edelberg, the first signs of a more subdued demand for workers have begun to appear.
The idea of a “soft landing” for the US economy, rather than a deep recession with serious effects for the rest of the world, is gaining more and more ground.
“As I see it, a soft landing includes a mild recession”says the economist, with the hope that the country manages to avoid a deep economic contraction that means high levels of unemployment.
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