Global price inflation is now at its highest level since 2008. The latest data from the Organisation for Economic Cooperation and Development (OECD) concluded that annual inflation across OECD countries reached 3.3% in the year to April.
This fast-rising price inflation was fuelled by higher energy prices and is up from 2.4% in the year to March.
The last time we saw price inflation at this level was in October 2008, during the onset of the global financial crisis.
A core measure of price inflation, excluding more volatile energy and food prices, still shows rising inflation, up from 1.8% in March to 2.4% in April. Prices are rising as the global economy recovers from the Covid-19 pandemic and economic activity resumes. But higher prices could pose challenges for policymakers as they consider their monetary policy response.
One option for central banks, in the face of higher price inflation, is to hike interest rates to cool demand. However, higher interest rates when there are significant public and private debt levels could result in problems with the cost of borrowing. As things stand, economists have no consensus as to whether the current bout of price inflation will be temporary or sustained.
There is a good argument for a transitory period of higher prices before a return to trend. Should we see temporary price inflation, policymakers could avoid tightening monetary policy in response, giving economies and consumers breathing space to adjust to a restored level of economic growth.
The latest OECD figures suggest that price inflation experiences in different countries differ, with a great deal of variance across the 38 OECD countries. In the United States, price inflation reached 4.2% in the year to April, up from 2.6% a month earlier. The inflation rate in Canada was 3.4% in April, up from 2.2% in March.
In Europe, we experienced more modest price rises, with inflation at 1.1% in Italy, 1.2% in France, 1.6% in the UK and 2% in Germany. Despite more modest price inflation in Europe, there are indications that prices here will continue to rise, driven higher by rising energy prices.
The OECD is forecasting a slow down in rising prices towards the end of the year, once global supply chains have been restored and production capacity returns to more normal levels. Higher wages are not expected to feature in 2021, due to the significant number of workers still out of employment, despite some signs that countries are experiencing a shortage of workers.