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Is Inflation Under Control?

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The term ‘under control’ can be subjective, and it often depends on the perspective and expectations of various stakeholders. Let’s look at both the United States and Europe.

IN THE UNITED States, inflation is currently running at 3.7%, which is down substantially on the same time 2022 which was 8.2%. The U.S. Federal Reserve, the country’s central bank, has a dual mandate of maintaining price stability and maximising employment. As we know the target inflation rate is 2% measured by the Personal Consumption Expenditure price index.

The combined impact of the pandemic and Ukrainian war led to a dramatic increase in inflation globally. The U.S. witnessed a noticeable uptick in inflation attributed to several factors. COVID-19 pandemic disrupted global supply chains, leading to shortages and higher input costs which in turn led to higher cost of goods. The FED implemented expansionary monetary policies, including lowering interest rates, and purchasing assets to support the economy during the pandemic. Massive government stimulus packages, such as CARES Act and American Rescue Plan injected significant amounts of money into the economy which increased consumer spending, further fuelling inflation. Fluctuations in energy prices
exacerbated the issue.

The debate over whether inflation is under control in the U.S. remains contentious, one reason is that the 3.7% figure is up 0.4% from previous month. The Fed has signalled its intention to let inflation run above its target for some time to ensure a sustained economic recovery, the Fed believes inflation is temporary and largely driven by supply chain issues which will over time be rectified. The counter argument to this is that inflation could persist eroding purchasing power of consumers, impacting their standard of living.

In Europe, the European Central Bank has the responsibility for maintaining price stability. Similarly, it has the same aim for an inflation rate of close to, but not below 2% but it does not have the same mandate of maximising employment.

Europe as we know has experienced similar inflationary challenges as the U.S. for similar reasons but unlike the U.S. the situation varies across EU member states.

Heterogeneous inflation, basically inflation rates differ among member countries, with some experiencing higher inflation such as Slovakia at 8.4% in August 2023 while Belgium is at -1.7% the lowest in the EU. The contrast to the U.S. is several factors: structural issues such as a low growth economy, an aging population and rigid labour force. This makes it harder for the ECB to control inflation effectively.

The debate whether inflation is under control in Europe is also contentious. Many are celebrating the fact that the October inflation rate fell to 2.9% but the IMF has advised policymakers that there is a need for caution and that interest rates must be kept at current elevated levels until they are sure inflation is under control, despite sluggish growth or stagnation in many EU countries.

When it comes to construction, periods of economic growth inflation are more likely to rise as demand for construction projects increases. Conversely, during economic downturns inflation tended to stabilise or even decline as demand decreased and competition intensifies. However, in 2022 the perfect storm hit construction and we had runaway inflation, again all caused by the same issues as discussed above, the main impacts though were supply chain issues and shortages of labour. In conclusion, we don’t know if inflation is under control. Headline inflation is falling across most OECD countries. But both the FED and ECB are taking a very cautious approach, as of Thursday 9 November Jerome Powell advised at a panel discussion at an International Monetary Fund conference, “If it becomes appropriate to tighten policy further, we will not hesitate to do so, and furthered with, “We will continue to move carefully, however, allowing us to address both the risk of overtightening.”

The concern on both sides of the water is that the elevated levels of inflation might stick around due to wage inflation, but on the other hand sluggish to zero growth leaves very little tools other than rate cuts in order to create economic growth. The tightrope balancing act will have to be maintained for some time.

Within construction material price inflation is still an issue, but it is becoming less of a driver as supply chains and cost of energy have stabilised compared to twelve months ago. The availability of skilled labour is still an issue with wage demands driving tender price inflation.

Colm McGrath, Managing Director of Surety Bonds

This article originally appeared in Irish Building Magazine Issue 4, 2023.