G20 economies must heed the warning that inflation has not been tamed, but will they?

At their meeting this week, G20 finance ministers are warned against any premature celebration. Despite data that showed price rises are moderating, the battle is not yet over

Anthony Rowley

Published: 1:00am, 23 Jul 2023

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The remarkable and alarming feature of the current run of inflation is not so much its persistence as its pervasiveness. Inflation is well above central bank targets in many countries, which is indicative of chronic sickness rather than mere malaise in the global economy.

Finance ministers from the Group of 20 (G20) nations were confronted with this and other stark economic realities during a presentation by International Monetary Fund (IMF) managing director Kristalina Georgieva at their meeting in Gandhinagar, India, earlier this week.

The fact the meeting ended without consensus on key issues was symptomatic of the divided state of the global community. “We still don’t have a common language on the Russia-Ukraine war,” Indian Finance Minister Nirmala Sitharaman said as the meeting ended without a joint statement.

“The top priority is to durably bring inflation down,” Georgieva said, going on to warn that any let-up in the battle against rising prices could overturn what success has been achieved so far. “A premature celebration can reverse hard-won gains made so far in the disinflation process.”

Not all of the G20 finance ministers were there to hear her words. Ministers from six countries – Argentina, Brazil, France, Mexico, Germany and Britain – did not attend the meeting, with some sending representatives. The absent countries cited a need to deal with other, often domestic priorities, suggesting an unwillingness to confront the seriousness of the problems on the G20’s agenda.

US Treasury Secretary Janet Yellen (left) and India’s Finance Minister Nirmala Sitharaman speak on the sidelines of a G20 meeting of finance ministers and central bank governors, in Gandhinagar, India, on July 17. Photo: EPA-EFE

Inflation is certainly high in importance among these, as are the issues of how to ward off a potential global debt crisis and financial system stresses caused partly by central bank policy actions in response to inflation.

During the finance ministers’ meeting in Gandhinagar, Georgieva presented IMF data that ran counter to perceived trends in inflation among advanced economies and those in developing or emerging countries. Among the advanced economies it listed, Spain, South Korea, Japan, Canada, the United States, Australia, France, the euro zone, Germany, Italy and the United Kingdom all had year-on-year inflation that was significantly above their target level or range.

Emerging economies admittedly tend to have somewhat less rigorous inflation targets than do advanced economies, which are often focused on holding to their 2 per cent target. But judging from the data, emerging economies are doing a better job of keeping inflation under control than the US, the UK or Europe.

This applies both to “core” inflation – which relates to all the goods, services and commodities produced in an economy, minus the more volatile prices of food and fuel – and to “headline” inflation, which relates to all of an economy’s commodities, goods and services.

3 takeaways as China’s deflation risk rose in June

Meanwhile, what is the state of Russia and China? Both are founding members of the G20 but, for different reasons, are considered beyond the pale in many discussions of economics. Their experience of inflation is very different from that of their fellow G20 members. China’s consumer price index remained unchanged last month from a year earlier, while in Russia the rate is between 2 and 3 per cent. In both cases, subdued consumer demand is a strong influencing factor.

China has its own economic problems, of course. Foreign media outlets rarely miss an opportunity to highlight these issues and are now drawing attention to the danger of the Chinese economy entering a liquidity trap and a deflationary spiral. While this is not the place for discussion of such risks, it is worth remembering that Japan was once the focus of the US for its economic advances and was also said to be mired in a liquidity trap.

It escaped that trap, thanks to measured monetary policy, and came through with low inflation and steady growth. By contrast, the US and much of Europe is caught in an inflationary cycle where prices are rising across the economy, igniting higher inflation expectations and upwards pressure on wages and demand. This is far from being a virtuous circle but is instead more a vicious upwards spiral.

Kristalina Georgieva, managing director of the IMF, said during the G20 meeting in Gandhinagar, India, that inflation was still too high and could require further monetary tightening to get under control. Photo: Bloomberg

This is occurring against a background of record levels of debt at government, corporate and household levels. Even if interest rates in these economies slow or even halt their rise, they are not going to fall any time soon, which augurs financial stress and distress.

As Georgieva said in her remarks to the G20 finance ministers’ meeting, “headline inflation is still too high and core inflation remains sticky despite the significant monetary policy tightening. … Inflation could remain higher for longer, requiring even more monetary policy tightening”.

Or as analyst Enzio von Pfeil commented in his Money Talk podcast on July 20, “the Fed’s policy dilemma of abating demand pull inflation clashing with stubborn wage-push inflation suggests rate rises of another 25 to 50 basis points this year”. He added, “blue-eyed optimists, beware!”

The portents for the summit meeting of the G20’s political leaders – set for New Delhi in September – do not exactly look promising, though the blame for that should not fall on the shoulders of the host country. Even now, the world’s leaders need to take note that it is still, in fact, the economy, stupid.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs