Which policy will succeed in preventing inflation?

The post-pandemic global economy is revealing different approaches to curbing inflation, from China’s zero-tolerance COVID-19 policy to the rapid pace of the Federal Reserve’s monetary tightening.

In the case of China, a short-term economic recovery has been hampered by lockdowns in key industries, and inflation recently stood at 2.1% (year-on-year for October). In contrast to the global trend, China’s inflation rate has fallen to 2.8% in September last year. Although this was not the intended outcome of the country’s public health policy, it has thus far avoided the worst inflationary pressures affecting other nations.

China’s monetary policy remains accommodative after the People’s Bank of China (PBOC) expanded financing to the private sector by launching a program of quantitative easing (QE). This program will allow to buy bonds of private companies worth 34.52 billion USD.

Contrast that with the U.S., where the economy is accelerating in late 2021, pushing inflation higher and setting the stage for a rate hike after a simultaneous rise in prices.

The rise in inflation was accentuated by high crude oil prices after the war in Ukraine, prompting the Fed to reverse course as quickly as possible. Rate hikes of up to 0.75% per month have become the new normal, but inflation continues to weigh on the US economy, overshadowing an otherwise uneventful picture after the country returned to growth in the third quarter.

Based on the above scenarios, you wonder which way to stop rising inflation: slower economic growth or higher interest rates?

A third scenario occurs in Japan, where monetary policy is over-accommodative and inflation reaches 3% while economic growth is subject to no COVID constraints. Tourists are now allowed to return to Japan, which is expected to add about $35 billion to economic output, the kind of cash injection the country needs after two years of growth in travel volumes.

The post-pandemic UK economy has more vulnerabilities in the form of high inflation, rising interest rates and weak economic growth. Tighter fiscal and monetary policies could weigh on sentiment, and support from the European Union is no longer an option after Brexit. On the other hand, the employment sector is relatively stable and wages are increasing, although not as fast as inflation.

Europe faces high inflation rates, but policy has been slower to raise interest rates than the US, meaning interest rates in the eurozone are lower than in the US, putting the euro at a disadvantage against the dollar. On the other hand, the economic bloc remains in a growth region and unemployment is relatively low.

Time will tell which policy will be more effective in curbing inflation. Because every economy is unique, one policy that fits all does not fit all, and traders should keep a close eye on developments as they affect the currency and stock markets.

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