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 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%.
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.