We are in a double bind right now. Prices are going through the roof but all the signs suggest that the economy is weakening. The answer to higher prices is normally to raise interest rates, but this also induces people and firms to spend less money. The challenge for central banks is to try and deal with both problems at the same time.
We asked three economists whether they saw a way of bringing down inflation without causing a severe recession. Here's what they said:
Jonathan Perraton, Senior Lecturer in Economics, University of Sheffield
The Bank of England's decision to raise interest rates by a relatively modest 0.25 percentage points to 1.25% contrasts with the US Federal Reserve's 0.75 points hike the day before to a range of 1.5% to 1.75%. This reflects concerns in the UK that economic growth will be weaker than previously forecast.
It follows the unexpected news that the UK economy shrank by 0.3% in April, plus sobering forecasts from the Organisation for Economic Co-operation and Development (OECD) that the UK will be the worst performing major economy in 2023 apart from Russia. GDP is now only fractionally above its pre-COVID level and all major sectors are shrinking.
The Bank of England's caution is despite inflation currently being at 9% and now expected to reach 11% in the coming months. These are levels not seen since the 1980s. Forecasts have the UK experiencing one of the highest inflation rates of the leading economies.
Inflation is a worldwide problem thanks to pressures on supply chains after COVID and higher energy and other commodity prices following Russia's invasion of Ukraine. However, US economist Adam Posen has pointed to Brexit as a key factor in explaining Britain's relatively high inflation. This has meant higher trading costs, weak sterling and labour shortages.
Unemployment has fallen to only 3.8%, although employment rates are still below pre-COVID levels, pointing to more people being inactive particularly older workers. Staff shortages have become a key feature of the British economy.
You might expect this combination of low unemployment and unfilled vacancies to drive up wages. Instead regular pay, excluding bonuses, fell by 2.2% in real terms in June, the largest fall for over 20 years. So at least this does not yet appear to be a classic wage-price inflationary spiral, where firms give way to demands from workers for higher pay, pass on the costs to consumers in the form of higher prices, and workers demand even higher wages to cope. Having said that, bargaining rounds are yet to be completed and we are seeing more wage disputes in some sectors.
Read More at https://www.businesstoday.in/latest/economy/story/is-a-major-recession-unavoidable-economists-give-their-views-338221-2022-06-19