Developed nations battled inflation in 2024

MOSCOW

Developed nations battled high inflation in 2024 following the coronavirus pandemic that began in late 2019, and achieving target inflation rates will be challenging in 2025.

The war in Ukraine, combined with the pandemic’s aftermath, further complicated efforts to meet inflation targets, according to the Organization for Economic Co-operation and Development (OECD). Supply chain disruptions and the rapid rise in energy and food prices contributed to a massive surge in inflation worldwide, significantly affecting the cost of living.

Advanced economies like the US and some European countries reached 40-year highs in inflation after years of relatively low inflation. High inflation continues to challenge many countries and their central banks, despite aggressive interest rate hikes.

In December, the Federal Reserve reduced its policy rate by 25 basis points as expected but cautioned that efforts to combat inflation would persist into next year.

The bank's revised inflation forecasts were 2.4% for 2024 and 2.5% for 2025, driven by expectations of sustained inflation due to President-elect Donald Trump’s protectionist policies, including additional tariffs on products from China, Mexico, Canada, and Europe.

Economists warn that countries targeted by Trump’s tariffs could retaliate, negatively impacting US growth. The Fed’s cautious stance could lead to rising unemployment and persistent inflation.

While the US made progress in reducing inflation—from 9.1% in June 2022 to below 3% in recent data—additional tariffs could strain trade, strengthen the US dollar, and push up product prices.

Analysts note that a 1 percentage point increase in tariffs could raise annual inflation by 0.1 percentage points.

Trump’s stricter immigration policies may also contribute to an employment deficit, adding further upward pressure on inflation.

In Europe, central banks have made progress in combating inflation, but stagnant economic growth remains a key challenge for the region.

The eurozone's annual inflation stood at 2.2% in November. Analysts predict that the European Central Bank (ECB) may reduce its interest rates to 1.5% by the end of next year.

Nomura, a Japanese services firm, reported that Europe’s economic recovery will be slow, affected by weak consumption and poor prospects for Germany, which has seen its GDP stagnate since the pandemic.

Germany’s economy, which heavily depends on trade with the US and China, faces multiple challenges: rising energy prices due to the war in Ukraine, a lack of investment, and deteriorating demographic trends.

Germany's export-dependent industry, accounting for 30% of its GDP, is hurt by a global economic slowdown, rising protectionism, and increased competition from China.

Germany’s economy contracted 0.3% in the second quarter of the year and grew only 0.2% in the third quarter, narrowly avoiding a technical recession. It remains fragile due to persistent weakness in the manufacturing sector.

A report by the US-based Columbia Business School noted that trade restrictions have eased, and tight monetary policies have been in place in developing economies since the 1990s, making it easier for central banks to combat inflation. However, rising long-term real interest rates have made it harder for central banks to control inflation, leading to more frequent inflationary spikes due to global disruptions in 2024.

*Writing by Emir Yildirim in Istanbul