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Varanasi
Friday, January 21, 2022

Why is inflation surging around the world?

High inflation is wavering the global economic outlook. Organisation for Economic Co-operation and Development (OECD) forecasts that global growth is set to hit 5.6% this year before moderating to 4.5% in 2022 and 3.2% in 2023. The inflation is likely to persist in to the middle of next year.

Source: OECD

The annual retail inflation rate in Bharat increased to 4.48% in October 2021 compared to 4.35% in September 2021 and slightly higher than market estimates of 4.32% due to surged food prices. Financial markets in Bharat remain strong and capital inflows support the build-up in reserves. The appearance of a new virus variant, if accompanied with a relaxation of attitudes, shall be the major downside risk.

As the Covid-19 pandemic showed signs of fading away, the economies started to boomerang. They have been regaining strength to bounce back from lower productivity levels and trying to cope up with the huge unmet demand in the market.

A huge stimulus was injected in the economies by the central governments that increased the purchasing power of consumers amid uncertain time of pandemic. But the industries could not meet the demand as they were severely hit by the pandemic induced lockdowns. This has increased demand more than the supply in the global market and led to price rise in almost all the goods across various economies. The supply chain problems has made difficult for producers to meet the demand for goods.

What incites the global inflation?

  • Every year more than 1 trillion semi-conductor chips are manufactured and used across the world. Due to lockdown, demand for chips crashed down as many production lines were temporarily closed. Post lockdown, the manufacturing did not take place with full efficiency. This led to shortage of chips in the market compared to its demand. Many companies started stocking the available chips instead of selling them in market through exports.
  • Labour force was the most affected during lockdown due to operational shut downs of companies. However, post lockdown the worker crisis was seen as this slowed down the production. Many workers switched their jobs from full time to part time employments and many people left their jobs to opt for individual entrepreneurship. Many women lost their jobs impacting their socio-economic well-being.
  • Climate change is emerging to be a major cause of concern affecting global crop yield and has created food crisis. Weather abnormality like erratic rainfall, excessive snowfall and arid land is affecting global food ecosystem. Food supply is interconnected hence if we see the food prices rising in one country, it will show its negative impact on other countries and pass on inflation.
  • Nearly 90% of global trade is carried out through shipping industry. The growth of big ports have not increased in proportion to number of large cargo ships. Due to decline in worker population, on-loading and offloading time at ports have increased. Oil prices have also soared the shipping costs by at least 10 times since last year.
  • Global energy prices have increased the cost of transport across the world fuelling inflation.

Various policy makers and economists across the world had reiterated that inflation is transitory and shall soon fall back into their inflation target band when demand and production returns to normal. However, the inflation kept rising and seen to be lingering now due to strained supply chains across the economies.

This compels the major central banks to consider tightening of the economies through increasing interest rates and by withdrawal of their massive bond purchase programme. There are countries like Brazil, Mexico, Russia and Peru that have raised their interest rates recently.

There is a fear of resurgence of Covid-19 in a new form of variant “Omicron” that has already started to spread throughout the globe and is triggering fear and concern across countries and governments. In all, 373 cases of Omicron variant is detected in 29 countries and appears to be 500% more infectious than previous variants.

The world is apprehensive if the new variant will get curbed with existing vaccines or will it further weaken the effectiveness of these vaccines. Going forward, this variant may also bring fresh round of tighter lockdowns. Thereafter, any fresh phase of supply chain disruption would smack economy harder but the prices of goods may start coming down if the demand gets smashed again.

Conclusion

High inflation and low interest rates is a double whammy for household budgets. Inflation eats away the purchasing power while the hard earned money being parked in banks aren’t fetching any good returns. The global stock markets and cryptocurrency is trading at all time high currently and hence redirects the consumers to invest in such asset classes that offer good returns amid the uncertain situations like this.

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Criti Mahajan
An MBA graduate in finance with 5 years of working experience in the financial services space. An enthusiastic research writer inclined towards understanding economics and policy making with an experience of diversified writing on professional platforms in economics. A self-starter, perseverant and an ardent learner.

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