Super-tight policy is still struggling to control inflation

In october we examined the fortunes of Hikelandia. In this group of eight countries—Brazil, Chile, Hungary, New Zealand, Norway, Peru, Poland and South Korea—central banks have thrown the kitchen sink at inflation. They started raising interest rates well before America’s Federal Reserve and on average have done so more forcefully, too. Yet we found little evidence that their determination was being rewarded with lower inflation. Hikelandia’s experience raised questions about how quickly monetary policy can control prices. Policymakers at the Fed have been watching closely.The latest data offer little reason for optimism. Hikelandia’s inflation problems are still worsening. “Core” inflation excludes volatile components such as energy and food, and is thus a better measure of underlying pressure. In December this hit a new high of nearly 10% year on year (see chart). Higher borrowing costs are not yet crushing Hikelandia’s inflation, but they are crushing its economy. Output is shrinking at an annualised rate of about 1%, down from growth of 5% early last year.