Over the Last year we examined the economic development of Hikelandia. In this group of eight countries – Brazil, Chile, Hungary, New Zealand, Norway, Peru, Poland and South Korea – central banks have fought inflation with unprecedented aggressiveness. Hikelandia started raising interest rates a full year before the Federal Reserve, well ahead of the curve. Since then, the average policy rate has risen by more than seven percentage points, compared to about five at the Fed. But for months, Hikelandia’s central bankers had little joy: inflation continued to rise.
Now that is finally changing. Although Hikelandia’s “core inflation,” a metric that accounts for fluctuating prices for things like food and energy, is still too high at around 9% yoy, it is on the way down, in part due to that the higher interest rates are beginning to have an effect (see chart). Hikelandia’s experience offers a glimmer of hope for other central banks fighting inflation.
Wage inflation eases across the country. In Chile, for example, wage growth is slightly below the outrageously high 11% recorded in January last year. This in turn helps to reduce inflationary pressures. In October, South Korea’s inflation rate in the labor-intensive service sector was 4.2% year-on-year; it has since fallen to 3.3%. Poland’s fell to 12.3% from 13.4% in December.
Inflation expectations are also falling, influenced by falling energy and food prices. The average Brazilian expects inflation to be 4% next year, compared to 6% for most of 2022. Kiwis expect inflation to hover around 1% five years from now, which is half of their forecast from December corresponds.
Norway is the only member of Hikelandia that doesn’t seem to be making any progress. In May, core prices unexpectedly rose 6.7% yoy, a new high. A weaker krone increases import costs. Strong domestic demand also plays a role. In June, the central bank surprised markets, raising interest rates by 0.5 percentage points to ease the situation.
Outside of Oslo, the mood music has changed in the central banks of Hikelandia. Officials still talk harshly, of course. South Korea’s rate setters insist they will maintain their tightening policy “for a long time”. Brazil’s monetary policy committee fears “a major or prolonged unanchoring of long-term inflation expectations.” However, this hides the fact that Hikelandia’s central banks have largely stopped raising rates. The Chilean bank assumes that the inflation risks have “balanced out”. Hungary’s rate-setters believe that “disinflation will continue to accelerate”.
However, success had its price. In 2021, the global economy and Hikelandia grew at the same pace. Global growth is now 2.5% on an annual basis and Hikelandia is flat. The unemployment rate has risen by almost a percentage point from its recent low in Chile and is rising slightly in Brazil and New Zealand. For a while at least, Hikelandia policymakers will likely see a weaker economy as a price worth paying. Inflation has a long way to go before we start calling these countries Cutlandia. ■
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