Year in a word: Inflation

(noun) a sustained rise in the level of prices

Inflation regained its position as the enemy of economic progress this year after a 40-year absence. With the rate of price increases hitting peaks close to 10 per cent in the US, eurozone and UK, a generation has had to worry about a rapidly rising cost of living for the first time in their working careers.

They have hated it.

US president Joe Biden classed inflation as “the bane of our existence”, making its defeat his top economic priority. He released the US strategic petroleum reserves in a bid to bring oil prices down. In Europe, leaders first blamed Vladimir Putin’s invasion of Ukraine and then, realising they had to do more, subsidised energy bills to take the sting out of a cost of living crisis.

Central banks could no longer claim to have given birth to a “great moderation” in inflation and instead have joined together in battle against the beast. They have done this with some of the sharpest and most synchronised rises in interest rates across the world for two decades.

The unspoken effect of tighter monetary policy, of course, is to make households and companies suffer even more because they are too frightened to keep asking for higher wages or to expect their customers to accept higher prices. High prices in 2022 are therefore likely to be the catalyst for recessions in 2023 even as headline rates of inflation start to fall.

For the future, economists have relearnt the need to fear inflation and prevent its emergence. Those arguing that central banks should target higher inflation rates of about 4 per cent have (partially) recanted. While it is impossible to stop every surge in prices, especially after a pandemic or a major war, the rise in general inflation in 2022 has once again highlighted the benefits of price stability.

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