US is exporting inflation, and Federal Reserve hikes will make it worse

For decades, US households bailed out the global economy when it needed a consumer of last resort. America’s latest spending spree has come with a sting in the tail.

Stuck at home in the pandemic, people all over the world bought more goods—TV sets, laptops, and exercise bikes, to name a few—at the expense of services such as hotel rooms and gym memberships. The shift was significantly bigger in the US than in other rich countries.

It’s been amplified by such retailers as Target Corp. and Walmart Inc., which piled even more stuff in their inventories than Americans wanted to buy. And since these goods are traded globally—with supplies constrained by Covid-19—US demand pushed up prices in other countries, too.

In effect, the US has been exporting inflation during its pandemic rebound.

That underscores a profound change in the global economy. In the pre-Covid world, goods were abundant and the challenge was finding buyers.

In the new age of scarcity, that story has been flipped on its head.

Now there are signs that American consumers are dialing it back as the Federal Reserve ratchets up interest rates to cool the economy and combat inflation.

For the rest of the world, that may just create a different headache as the US switches to exporting inflation through another channel: the super-strong dollar.

With rates in the US rising much faster than in the euro zone and Japan, the dollar is soaring.

To be sure, consumer demand is just one cause of the worldwide spike in inflation—arguably not the main one even in the US, where Covid stimulus was largest. In Europe and elsewhere, energy and food costs are driving up inflation as Russia’s invasion of Ukraine exacerbates pandemic-induced breakdowns in supply chains.

Still, at least some of Europe’s inflation is a trans-Atlantic import, says Holger Schmieding, chief economist at Berenberg Bank in London.

“Not directly in the sense that we bought expensive things from the US,” he says. “But in the sense that the US, and their large demand following the stimulus checks, contributed to supply bottlenecks around the world—and to higher prices.”

Since pandemic inflation took off last year, the US has had more of it than Europe. Lately the gap has narrowed, but that doesn’t tell the whole story.

The two economies may have similar rates of inflation, but they have different kinds, with major implications for how central banks can tackle the problem. Much of the distinction boils down to how big a share of price pressures is homegrown.

The risk, he says, is that a widening gap in rates “fuels capital flight and sharper currency depreciation against the US dollar, adding even more inflation pressure.”

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