Why are modern economies struggling so badly with inflation today?
As its effects are so devastating, one would be forgiven for thinking that various nations are already adept at preventing it. Despite the best fiscal and monetary measures, 2022 has been a year where the effects of inflation have been felt strongly. Even the so-called first-world countries have not escaped unscathed.
Before we examine some theories and explanations regarding why so many countries struggle with inflation today, let’s take a closer look at the real-world context.
Global inflation insights
The global increase in inflation started in mid-2021. Although slow economic growth was expected in the wake of the global pandemic, few would have foreseen full-blown worldwide inflation troubles.
Here are some key insights for this period:
- The global inflation rate is forecasted to hit 8.8% in 2022
- The Bundesbank, Germany’s Central Bank, has adjusted national inflation figures for 2022 to 7.1%.
- The UK’s annual inflation is projected to hit 15% in 2023.
- The Turkish government predicts an over 60% inflation rate for 2022.
- The Federal Reserve has increased interest rates to the highest level since 2008.
In fact, it becomes more worrisome when you realize that experts warn that the ongoing global inflation could last for several years.
What, then, is the cause of this inflation?
Global Inflation – How did we get here?
It is first important to understand exactly what inflation means. Inflation entails a surge in prices and a marked decrease in the value or purchasing power of money over time.
While it’s easy to examine price changes over time in terms of individual products and everyday commodities, inflation goes beyond that. Regular commodities like grain, processed food, electronics, and electricity utilities are included. In addition, elements like labor, entertainment, and healthcare are not exceptions to the measure of inflation.
Like other economic aggregates such as Gross National Product and Gross Domestic Product, inflation considers all the factors of production, including the cost of labor.
What are price indexes?
Price indexes are a measure for calculating the price of various classes of goods and services over time in a specific region. These indexes include the consumer price, producer price, and wholesale price indexes.
As you may already know, the prices of goods and services have been rising sharply for many months. There are many reasons for this, based on measures of economic price indexes and other factors. Let’s discuss some of these reasons:
The Effect of Politics
More than anything else, increased inflation rates in many parts of the world today can be traced to a political conflict – the Russia-Ukraine War.
On the surface, it seems hard to imagine that two warring nations can have such a massive effect on global affairs. But in reality, it’s true! From the onset of the war, the West and her allies have sought to undermine Russia in a cold war fought separately from the rattling of machine guns in the Ukrainian battle theater.
First, the European Union (EU), North Atlantic Treaty Organization (NATO), and their allies issued severe economic sanctions on Russia, culminating in the banning of Russian gas purchases by EU states. With Russian gas making up about 40% of all EU gas imports before the war, it’s no surprise that the UK is experiencing its worst energy crisis today.
Gas aside, the ripple effects of Russia’s alienation have been felt around the world, given just how much of a big player the country is in the global economy. For instance, the supply chains of other commodities, such as grain, have been equally affected. Again, this is hardly surprising, seeing that both nations are major exporters of the produce.
The onset of the COVID-19 pandemic saw nearly all global economic activity draw to a grinding, abrupt close. There was no way physical trade could happen when a deadly virus was ravaging the world.
By the time scientists had developed a vaccine for the coronavirus, several businesses were already dead. Most businesses that were able to survive were organizations that found a way to adapt to remote working and remote service provision, such as Amazon.
With lockdowns only slowly easing in mid-2021, businesses have been equally slow to recover – plunging the world to the brink of recession as predicted by the World Bank in 2020.
Monetary policy and inflation are interrelated. Although some economists have argued otherwise, the case of the USA and her stimulus checks have only helped prove the phenomenon’s reality.
During the pandemic, the US government gave out $803 billion as financial relief to struggling households. Additionally, the Federal Reserve lowered its interest rates to spur economic activity. However, these interventions backfired.
As the USA struggled to match its economic output of the pre-pandemic years, the increased money supply would only lead to one thing – inflation.
The Almighty Supply Chain
The rise in the cost of goods and services can be traced to supply chain issues. There is a long supply chain of constituent parts that make up the final product for every car, processed food item, and commodity out there.
Today, manufacturers struggle to deliver their quotas to end consumers due to supply chain issues. This phenomenon is best typified by Ford’s struggle to deliver vehicles with its trademark-branded nameplates.
With global supply chains in such a dire state, the resulting effect on prices has hardly been surprising.
With inflation at historically high levels globally, businesses and individuals must take definite steps to adjust to current realities. Unnecessary spending should be avoided, while debt profiles should be kept low.
On the other hand, there’s no better time to invest than the present, given the high-interest rates. Meanwhile, the world should brace itself for a recession potentially worse than the 2008 financial crisis.
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