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The Canary in the Inflation Coal Mine

The current bout of high inflation has many causes, but one major driver that remains under-recognized is the rise in global shipping costs. The rapid increase in transport costs last year was a harbinger of the current inflationary surge and indicated that price pressures might not be as short-lived as central bankers believed.

WASHINGTON, DC – In his Jackson Hole speech in August, US Federal Reserve Chair Jerome Powell made clear that curbing inflation is the Fed’s top priority. While the Fed has distanced itself from its assessment last year that the inflation pickup would be short-lived, the grounds for that assessment were tenuous even when made, given the many uncertainties about the drivers of inflation at the time. One such driver in particular, rising shipping costs, has been under-studied, despite being an important contributor to – and predictor of – inflation. Even last year, the surge in shipping costs was a canary in the coal mine pointing to the need for higher interest rates to counter building price pressures.

The mandate of the world’s major central banks is to maintain price stability, which means that monetary policymakers need to identify the sources of inflation and anticipate its trajectory. Central bankers undoubtedly missed the mark by initially dismissing the sharp increase in inflation in 2021 as “transitory,” as Powell once did. But other institutions also made the same mistake. The International Monetary Fund, for example, likewise failed to anticipate the pickup and durability of inflation. Its macroeconomic forecasts for the United States were similar to the Fed’s projections.

The IMF figures also underscore the extent to which the inflation surprise had a global dimension, affecting countries around the world from Australia to the United Kingdom, where policymakers were caught off guard. The IMF’s Spring 2022 World Economic Outlook shows that its inflation projections from a year earlier were off by a factor of more than three for advanced economies and by a factor of more than two for developing and emerging-market economies, as well as for the world as a whole.