Welcome to Hikelandia, where inflation just won’t budge
little unfair. In July 2021, as rate-setters in America and Europe dismissed the risk of entrenched inflation, the Central Bank of Chile got its act together. Worried that inflation would rise and stay high, its policymakers voted unanimously to lift rates from 0.5% to 0.75%. The bank has since raised again and again, outpacing investors’ expectations and taking the policy rate all the way up to 11.25%. Perhaps no other central bank has pursued price stability with such dedication.
Call the unlikely gang “Hikelandia”. In the year to October 2022 the median economy in Hikelandia raised rates by about six percentage points. If as expected the Federal Reserve raises rates by 0.75 percentage points on November 2nd, America’s cumulative increase over the past year will still be nowhere near as big.
Dig into the national statistics of Hikelandia, and the trends become even more concerning. Chile’s wage growth continues to accelerate. In September South Korea’s inflation rate in the labour-intensive service sector was 4.2% year on year, its highest since the early 2000s. In the past six months Hungary’s service-sector inflation has climbed from 7.2% to 11.5%. Across the club, inflation is becoming more “dispersed”, affecting a wider range of goods and services.
The second possibility is that policymakers, including those in Hikelandia, have not been sufficiently courageous. Perhaps central banks should have. This is an argument stridently made by Chile’s remaining “Chicago Boys”, libertarian economists who spearheaded the country’s free-market reforms in the 1970s.