Inflation or recession? Or is there any other option?
Inquiry of the editors of Külgazdaság about the main dilemmas of 2023
Having passed the years of deflation, followed by closures in 2020–2021 during the Covid–19 pandemic and the efforts of national governments and central banks to counterbalance them by fiscal and monetary manoeuvres, inflation has arisen in the European economies and even globally. Since the Russian forces attacked Ukraine in February 2022 the prices of food, natural gas, electricity, and some raw materials skyrocketed, adding an extra cost-push to the already existing inflation pressures. First, the US Fed started to loft the federal funds rate in March 2022 to cope with it, and the ECB followed suit only in September. Both in the EU and the US a new dilemma has arisen: would the interest rate hike cause recession, at least in a technical sense or should central banks be more cautious with tightening?
Külgazdaság asked several questions to its authors: what are the main reasons for the present inflation, including the role of the war and the EU sanctions? Increasing interest rates would be an adequate technique to curb it when external shocks play a major role. Is there any optimum solution to the inflation versus recession dilemma? If governments intervene in the local markets to diminish the households’ burden through price caps, subsidies, and social benefits, do they do more good or harm? Should they try to diversify the energy imports and/or make huge efforts to use the local resources for electricity and gas production etc?
We asked our authors to adjust this set of questions to Hungarian policies as well. We received the answers in the period ranging from January 4th and February 12th, 2023.