IIn October we investigated the fortunes of Hikelandia. In this group of eight countries – Brazil, Chile, Hungary, New Zealand, Norway, Peru, Poland and South Korea – central banks have thrown inflation into the kitchen. They started raising interest rates long before the US Federal Reserve, and on average have done so more vigorously. However, we found little evidence that their determination was rewarded with lower inflation. Hikelandia’s experience raised the question of how quickly monetary policy can control prices. Fed policymakers have been watching developments closely.
The latest data offer little cause for optimism. Hikelandia’s inflation problems continue to worsen. “Core” inflation excludes volatile components such as energy and food and is therefore a better measure of underlying pressures. In December, this reached a new high of almost 10% year-on-year (see chart). Higher borrowing costs aren’t yet driving down Hikelandia’s inflation, but they are crushing its economy. Production is shrinking at an annualized rate of about 1%, compared to 5% growth early last year.
In some parts of Hikelandia, central bankers are having better luck. Core inflation in Brazil is now falling significantly. A trend reversal is emerging in South Korea. Elsewhere, however, less progress has been made. In Chile, average wages are growing at about 10% a year, far too quickly if productivity growth remains weak. Prices are rising in Hungary. Annual core inflation rose to 25% in December from 19% in August. We estimate that the prices of more than a fifth of Hikelandia’s inflation basket are increasing by a whopping 15% or more each year.
When will prices return to earth in Hikelandia? Recent data suggests that inflation is unlikely to rise well into double digits. But the longer the high inflation lasts, the more the citizens of Hikelandia will expect it. Just ask Hungarians, many of whom are obsessed with the cost of living. They now search Google for “inflation” as often as they search for “Viktor Orban”. ■
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