What’s causing the inflation crisis? — Analysis
Rising prices are the latest concern for the global economy. This is causing financial hardship for many billions. What can we do to stop this from happening?
Why do we hear so many things about inflation now?
The United States is experiencing the greatest price rises since 1982, a phenomenon that many economists thought had been curtailed for decades.
Inflation causes people to be rapidly dissatisfied with their lives because of the rising cost of daily items.
Gallup’s recent survey found that Americans making under $100,000 annually in the US have a lower income. “47% of these households [are] reporting hardship due to increased consumer prices,” according to CNBC.
That’s a lot of unhappy people, as the median household income in the US is around $68,000 per year.
What is the secret to this?
Inflationary conditions are a combination of several factors.
Inflation can be explained by too much money buying too few products and services.
This is why prices begin to rise quickly.
As a means of preventing the economic decline expected from the Covid-19 lockdowns, the world’s central banks led by the US Federal Reserve have infused unprecedented amounts of money into the world economy.
Massive financial stimulus measures, which were first implemented by Trump and then by Biden, poured large sums directly into US bank accounts.
In the US alone, money supply rose $5.7 trillion or 38%, from near $15.5 trillion to over $21 trillion in a little more than a year, at a time when the economy wasn’t making any money.
This $5.7 trillion finally made it into the economy. The limited supply of good and services has caused a rapid increase in inflation.
So, it’s just too much money?
No, not quite.
We don’t have the strong supply chain worldwide that we’ve come to rely on for the last few decades, which is why we now experience inflation.
“Manufacturers, farmers, restaurants and retailers relied on what they needed to be delivered ‘just in time.’ They got just what they needed, just when they needed it; this kept down their inventory costs and made the economic machine as efficient as possible,” said the American Farm Bureau.
This system has been in place for many decades and helped to keep inflation low.
The Covid quarantines – and global decoupling from China – broke this worldwide machine and the supply chain that used to keep prices down is now contributing to higher prices, because it’s either producing or delivering too few goods and services.
And, finally, in what’s known as “death spiral inflation,”Workers are pushing for increased wages in order to maintain inflation. This, in turn, can lead to more inflation because rising labor costs must be included into the prices of goods and services. This is repeated ad infinitum until the economy collapses – unless measures are taken to cool it off.
What will happen to the global economy?
To stem rising prices, the US Federal Reserve will be leading the world’s central banks. They will attempt to reduce or limit the flow of money to economies, mainly by increasing interest rates.
“The latest strong inflation report strengthens the case for Federal Reserve officials to agree next week to accelerate the wind-down of their stimulus efforts, clearing the way for them to potentially lift interest rates in the spring,” said the Wall Street Journal.
This means it won’t be as affordable to borrow money from anyone in the world, whether they are corporations or governments. It will also mean that the economy that we all depend on will slow down.
There were already signs that the worldwide economy’s expected recovery from the effects of Covid was going to be slower than anticipated next year.
“China achieved a truly remarkable recovery, but its growth momentum has been slowing notably,” warned the International Monetary Fund (IMF) earlier in December, impacted in part by the persistence of the Covid virus according to Barrons.
“Even before the arrival of this new [Omicron] variant, we were concerned that the recovery, while it continues, is losing somewhat momentum,”According to Agence France Press, Kristalina Georgieva is the IMF Managing Director.
And now Fitch’s rating service has lowered its global economic growth forecast for both 2021 and 2022 from 6% to 5.7% and 4.4% to 4.2% respectively, mentioning US inflation as a prime culprit in the cut.
“The sharp rise in global consumer goods prices since March primarily reflects a huge surge in goods demand, fueled by stimulus measures, particularly in the US,” said Fitch’s. “The scale and longevity of the global inflation shock has taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalization.”
“Global monetary policy normalization”This means that the world’s economies will have to pay higher interest rates, and therefore less money.
Is that what it means for me?
This means you need to try your best to live a normal life.
If you don’t have a job now, find one; if you are offered a job, take it; and if you have a job, keep it.
For a few years, the global economy is expected to continue growing above its historical averages even with rising interest rates.
“This is still the fastest rate [of world economic growth] since 1973… and far from stagflation,” said Fitch’s.
But as we’ve seen over the last few years, there are few guarantees for people in world that waits for normalization beyond just its monetary policy.
These opinions, statements and thoughts are the sole opinion of the author. They do not necessarily reflect those made by RT.