Inflation Is Now Global, But the Traps Are Local

When it comes to inflation accelerating around the world, don't count on a swift response from the two most important economies. The U.S. and China are trapped by their own policy choices and domestic priorities. Neither has much appetite for an assault on price increases. Germany's calls for a clampdown are too late.

For anyone still wedded to the idea that elevated inflation is a short-term phenomenon, a welcome respite from years of too-low readings, the latest numbers are sobering. Producer prices in China jumped the most in 26 years and consumer inflation picked up, Beijing said Wednesday. Hours later, the U.S. Department of Labor reported that consumer prices climbed at the fastest rate since 1990, outpacing economists’ expectations. Germany’s council of economic advisers demanded that the European Central Bank explain how it will rein in monetary policy. Inflation in the continent's pivotal nation will be above the ECB's target this year and next, the group projected.

Most central banks know how to deal with this, right? They simply raise interest rates. Even critics of prolonged easy money say that when it comes down to it, officials have a tried and true formula. Central banks dare not chance truly runaway levels of inflation and risk a return to the bad old days of the 1970s, at least in the U.S. and Europe. Or, in China's case, squander a big part of the prosperity and economic stability engineered by Deng Xiaoping’s opening of the economy. For all the talk about cold war between Washington and Beijing, China's inflation experience has largely tracked the West’s, according to a Reserve Bank of Australia paper published on the eve of the pandemic.

The current hand-wringing isn't happening in a vacuum, however. China is worried about growth, which is already slacker than the fourth quarter of 2019, before Covid-19 crashed over the world. What began in 2021 as a record-breaking recovery is at risk of fizzling out. Bank of America Corp. recently cut its estimate of China's expansion next year to 4% from 5.3%. The country will likely ease policy despite escalating inflation, rather than respond to it. Further cuts in the reserve requirements for lenders are in the cards. Premier Li Keqiang has warned of downside pressure on the economy.