The American economy in the European mirror


Last week, Eurostat, the statistical agency of the European Union, published a revised estimate of February’s inflation rate in the eurozone. It was not a happy report: consumer prices rose 5.9% from a year earlier, more than most analysts had expected. And it will get worse, as the effects of the war in Ukraine weigh on food and energy prices.

Britain has yet to release its February inflation figure, but the Bank of England expects it to match the eurozone rate.

Of course, US inflation is even higher, with consumer prices in February up 7.9% from a year earlier. These figures are not exactly comparable, for technical reasons, but inflation in the United States seems to be about two percentage points higher than in Europe. I will come back to this difference and what could explain it. But the fact that inflation is soaring in many countries, not just America, is certainly worth noting.

After all, the entire Republican Party and a good number of conservative Democrats insist that the recent spike in US inflation was caused by President Biden’s big spending policies. Europe, however, had nothing to compare to Biden’s US bailout; last year, the euro zone’s structural budget deficit, a standard fiscal stimulus, was only about a third of that, as a percentage of GDP, of that of the United States.

So why is inflation on the rise in Europe?

Part of the answer lies in rising energy prices. Last week, I noted that Kevin McCarthy, the Republican House Minority Leader, said gas prices “are not Putin’s gas prices. These are President Biden’s gas prices. Let me elaborate on the absurdity of this claim, using UK data.

At the end of December 2020, petrol in Britain cost 116 pence per litre, or $5.94 per gallon. By mid-March, that was at $8.23 a gallon. During the same period, gasoline prices in the United States rose from $2.24 to $4.32. Given the high UK petrol taxes, the price increases have been similar, even though Joe Biden is not, to my knowledge, the UK Prime Minister.

But it’s not just energy prices. Inflation in the United States has been driven in part by ongoing supply chain issues, with a significant shift in demand toward commodities weighing on ports, shipping capacity and more; those same tensions, which lasted much longer than many of us had anticipated, also afflicted Europe.

So what does high inflation in Europe tell us? First, that much – perhaps two-thirds – of the acceleration in US inflation reflects global forces rather than specifically US policies and developments. Second, because these global forces could subside if we finally emerge from this dark tunnel of pandemic and war, US inflation could eventually drop significantly, even without drastic policy changes. (Notice how I avoided using the word “transient”? Oh wait.)

That said, inflation is accelerating on this side of the Atlantic. Why? One of the main factors, almost surely, is that the US economy has recovered faster than Europe’s. In the fourth quarter of 2021, real gross domestic product in the United States was 3% higher than it was before the pandemic, while the euro zone had barely recouped its losses. And in case you’re wondering, you don’t need to factor in those numbers for faster US population growth; our working-age population has indeed stagnated since 2019, largely thanks to a slump in immigration.

And US economic growth has helped workers as well as GDP Although real hourly wages have been eroded by inflation, total labor compensation has risen 13.6% since the day before the pandemic, compared to just 5, 2% in Europe.

Now excessive inflation suggests that recent US economic growth has been too good. Our economy clearly appears to be overheating, which is why the Federal Reserve is right to have started raising interest rates and should continue to do so until inflation subsides.

But while overheating is a problem, we shouldn’t let it overshadow the good things that have happened. We recovered quickly from the pandemic recession and appear to have avoided the long-term “scarring” effects that many feared. Most, but not all, of the inflation we are experiencing likely reflects temporary global forces, and several indicators – consumer surveys, professional forecasters and financial markets – suggest that longer-term inflation expectations remain ’embedded’, that is, inflation is not taking hold in the economy.

There remains the question of why Americans feel so bad about the economy, or at least tell pollsters they feel bad (they spend like they’re bullish). We are not unique in this regard: European consumer sentiment has also taken a hit in the face of inflation, although nothing like the fall we have seen here. But this is a subject to which I will return another day.

For now, I would simply urge Americans to look at their economy in the European mirror. Recovering from the pandemic was always going to be difficult, and Vladimir Putin made it even harder. But under the circumstances, we’re doing relatively well.

The New York Times

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