The troubling trend is spilling over into every corner of the global economy, with dramatic effects. McKinsey Global Publishing looks at the latest data.
Every morning a new headline underscores growing economic concerns: Highest inflation since the 1970s. Central banks aggressively raising rates. Consumer sentiment at record lows. Commodity prices near all-time highs. Clearly inflation has, at a minimum, altered the economic mood, and potentially reset the path of global and national economies worldwide for years to come. McKinsey’s experts have examined many of the strategic implications of inflation. Here, we use the best and most recent publicly available data to offer seven charts illustrating inflation’s insidious progress.
Double trouble. In the past six months, inflation has far exceeded December 2021 expectations. In many countries, actual rates have doubled projections. European countries are particularly affected. For example, inflation in Lithuania is running at 15.5 percent annually, nearly five times the rate expected. Poland is at 11 percent and the United Kingdom at 9 percent, both well above projections. At 3 percent, Switzerland is an outlier. Asia is seeing a less severe change: Indian inflation is about 7 percent, only a bit above projections; and South Korea is at 5 percent. In China and Japan, inflation remains muted.
Here comes the cavalry. In response to inflation’s alarming rise, central banks worldwide are raising their core bank lending rates. So far, however, rate raises in most countries have not matched the pace of inflation.
As we discuss next, rising rates are expected to ease demand and lower prices for two critical components of headline inflation: housing and commodities such as energy and metals.
Eroding wages. From the components of inflation we turn now to two of its most critical effects on the global economy, starting with wages. Real wages had flatlined for many years in the biggest OECD economies. Just before the pandemic, real wages moved powerfully higher; tightening labor markets gave workers the upper hand in negotiations. The pandemic radically altered the equation, of course.
As economies stabilized and reflated, real wages began to creep higher again. But rampant inflation checked that growth, rising so fast that it has diminished the purchasing power of people’s take-home pay. For example, workers in the United Kingdom today have seen their real compensation fall by roughly 8 percent year-on-year.
A darkening outlook for growth. As prices soar, and show few signs of abating, the risk is that inflation becomes entrenched and central banks will have to raise rates more assertively to slow demand. Accordingly, many analysts are lowering their projections of economic growth. For example, in the OECD’s Economic Outlook, projected real GDP growth in Turkey is now about eight percentage points lower than previous projections; and Argentina’s is about the same. Projections for the United Kingdom are now 7.4 percentage points lower. However, with oil in high demand, projections for Saudi Arabia’s real GDP growth are now about 6 percentage points higher.
