Market News
June 14, 2023

Understanding The Impact of Inflation On Global Economies

Inflation is a rollercoaster ride where the general price of goods and services in the economy goes up, and it keeps going up over time.

Inflation is a rollercoaster ride where the general price of goods and services in the economy goes up, and it keeps going up over time. As the prices soar, it's like carrying a shrinking wallet, because your currency can buy you fewer things each day. Inflation is a double-edged sword – when it's mild, it can boosts company valuations, fuel economic growth, and help borrowers pay back their debts. But beware, when inflation runs wild or becomes unpredictable, it chips away at your purchasing power, shrinks your savings' worth, impacts economic decisions, and spreads uncertainty throughout the economy. Central banks and monetary experts play hero by striving to keep inflation rates stable, typically aiming for about a 2% increase per year. To hit that sweets pot, they use an arsenal of monetary policy tools such as tinkering with interest rates or putting reins on the money supply.

The various causes of inflation:
  1. Demand-Pull Inflation: This occurs when the demand for goods and services exceeds the available supply. When consumers have more money to spend or there is increased government spending, it can drive up prices as businesses raise prices to meet the higher demand.
  2. Cost-Push Inflation: This type of inflation happens when the cost of production for goods and services increases. Factors such as rising wages, increased raw material costs, or higher taxes can lead to cost-push inflation.
  3. Built-in Inflation: This type of inflation occurs when expectations of future inflation become embedded in wage and price-setting decisions. For example, if employees expect prices to rise, they may negotiate higher wages, which can lead to an increase in production costs and, consequently, higher prices.


What caused globe inflation after COVID?

Several factors contribute to the recent heighten inflationary pressure including:
  • Supply chain disruptions: The COVID-19 pandemic caused widespread disruptions to global supply chains, which made it more difficult and expensive to get goods to market. This led to higher prices for many consumer goods.
  • Increased demand: The COVID-19 pandemic also led to increased demand for goods and services, as people stayed home and shopped more online. This increased demand put upward pressure on prices.
  • Stimulus  spending: The U.S. government and globe central bankers spent trillions of dollars in  quantitative easing during the pandemic, which helped to keep the economy afloat but also     contributed to inflation.
  • Rising wages: Wages have been rising in the United States, as employers compete for workers in a tight labor market. This has also contributed to inflation, as businesses pass on higher labor costs to consumers in the form of higher prices.

The Federal Reserve is taking steps to try to bring inflation under control, but it is a delicate balancing act. If the Fed raises interest rates too quickly, it could lead to a recession. However, if the Fed does not raise interest rates enough, inflation could spiral out of control.

It is still too early to say how long inflation will last in the United States. However, it is likely that inflation will remain elevated for some time, as the economy continues to recover from the pandemic. According to Bloomberg economics, US inflation will stay well above the Fed's target, with zero probability of it dropping below 4%.

 How the United States is impacting inflation to other countries?

The Federal Reserve is laser-focused on stemming price increases in the United States. But countries thousands of miles away are reeling from its hardball campaign to strangle inflation, as their central banks are forced to hike interest rates faster and higher and a runaway dollar pushes down the value of their currencies.

“We’re seeing the Fed being as aggressive as it has been since the early 1980s. They’re willing to tolerate higher unemployment and a recession,” said Chris Turner, global head of markets at ING.
“That’s not good for international growth.” He adds.

The Federal Reserve’s decision to raise rates by three-quarters of a percentage point at three consecutive meetings, while signaling more large hikes are on the way, has pushed its counterparts around the world to get tougher, too. If they fall too far behind the Fed, investors could pull money from their financial markets, causing serious disruptions.

Central banks in Switzerland, the United Kingdom, Norway, Indonesia, South Africa, Taiwan, Nigeria and the Philippines followed the Fed in boosting rates over the past week.

The Fed’s stance has also pushed the dollar to two-decade highs against a basket of major currencies. While that’s helpful for Americans who want to go shopping abroad, it’s very bad news for other countries, as the value of the yuan, the yen, the rupee, the euro and the pound tumble, making it more expensive to import essential items like food and fuel. This dynamic — in which the Fed essentially exports inflation — adds pressure on local central banks.

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