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How inflation and interest rates vary around the world

    From Melbourne to Manchester to Miami, people are struggling under the weight of soaring price hikes for the things they buy every day.

    The worst inflation spike many advanced economies have seen in decades underscores the global forces driving up prices, namely the disruptions set in motion by the coronavirus pandemic.

    The stakes are high for policymakers around the world, who face similar challenges. To try and control inflation, central bankers have been quick to raise interest rates, trying to slow down their economies in hopes of cooling down prices.

    If they fail to bring inflation under control, it could lead to a destabilizing period of rising prices. Higher and less predictable inflation would put pressure on households and businesses and make it more difficult to plan for the future.

    But if economic policymakers react too aggressively – and suddenly – it could hurt global economic growth painfully. That could increase the risk of a major recession closing businesses and putting people out of work. Given the potential cost, policymakers don’t want to overdo it, hurting their economies more than necessary to bring inflation back down.

    Many central banks approach those compromises in the same way: they aim to combat stubbornly high inflation. Officials fear that if they allow inflation to persist for too long, it could become entrenched and prove even more painful to stamp out.

    The leaders of major central banks in North America, Europe and elsewhere have recently said they expect to continue raising rates as inflation moderates but remains well above their typical target rates – which are often around 2 percent.

    US Federal Reserve officials raised their policy rate from near zero in March 2022 to just over 5 percent, and they predict they will raise it two more times in 2023, to just over 5.5 percent. Policymakers at the European Central Bank, which sets policy for the 20 countries that use the euro, also expect to raise interest rates further, which have reached their highest level since 2001. The Bank of England recently surprised investors by raising rates more than expected with its 13th consecutive hike.

    Inflation rose sharply in the United States in 2021, but has fallen faster than in many parts of Europe. This is partly because Europe is more exposed to the consequences of the Russian invasion of Ukraine, which has driven up food and energy prices.

    But if we take out those volatile prices, so-called core inflation looks stubborn in many countries. That underscores the common problem facing policymakers: slow-moving prices for services are rising much faster than before the pandemic.

    Prices for labour-intensive services such as medical care and education tend to follow wage increases and the strength of the overall economy. In short, they are the kind of price hikes that central banks can address by raising interest rates to slow borrowing, curb spending, and ultimately cool the economy.

    At a recent meeting of central bankers, Jerome H. Powell, the chairman of the Fed, said that for inflation in the services sector, such as hotels, restaurants and banks, “we don’t see much progress yet.”

    Chart sources: FactSet (policy rates); Organization for Economic Co-operation and Development (inflation rates).

    The map includes OECD members and selected major economies. The line charts show the latest central bank policy target rates and year-over-year changes in consumer price indices as compiled by the OECD from May. For Australia, the change in consumer prices concerns the first quarter of the year.

    Esh Nelson reporting contributed.