What is Global Inflation?
With U.S. inflation reaching a 40-year high, global inflation over the past year increased from less than 2% to more than 6%, the highest level since 2008. 90% of the world’s economies are affected by inflation, including nearly all industrialized nations as well as the majority of emerging market and developing economies. So, what exactly is global inflation? After the pandemic broke out in 2020, a number of nations had to halt production in order to contain and prevent the epidemic, which reduced available production space and produced an excess of all commodities, particularly in labor-intensive industries. The price increase of Coca-Cola is a very good example of how price increases in the upstream or input costs of the industry chain will further lead to price increases in the downstream or end products. For example, primary processing products, minerals, textiles, etc., the shortage of supply is bound to bring about price increases.
Since this year, there has been an increase in global inflation. For instance, the first five months of the CPI in the United States saw monthly increases of 1.4%, 1.7%, 2.6%, 4.2%, and 5% year-over-year. The eurozone likewise saw a trajectory similar to that of the United States, reconciling the CPI increased to 2% year-over-year in May, which is already the maximum the ECB can allow. The tendency is much more severe in emerging and developing economies. Take Russia, India, and Brazil, for instance, which in May reported CPI increases of 6%, 6.3%, and 8.1% year-over-year, respectively, all of which were the highest levels in recent years. In light of this, we must examine the factors contributing to the current worldwide inflation.
What Causes Global Inflation?
In fact, the primary causes of the current global inflation are straightforward, the main reasons are as follows.
First, the financial aspects. The United States’ central banks strengthened their quantitative easing monetary policy in reaction to the sudden pandemic, which resulted in a money supply driven by price hikes. the cost of assets Without giving an example, the expansion of the money supply will inevitably result in greater asset prices. As we are all aware, the United States’ increasing stock market symbolizes an increase in wealth, which will certainly result in price hikes driven by demand. The surge in real estate prices has also been made worse by the quantitative easing policy at the same time. For instance, according to data from the National Association of Realtors, the median price of existing homes in the US increased by 19% in April from the same month the previous year to a record $341,600. It should be highlighted that despite the epidemic, real estate prices in the United States and Europe increased by more than 4.5% in 2020.
Second, the economic stimulus increased demand globally, which will eventually lead to inflation that is driven by demand. From a U.S. viewpoint, the Biden administration is moving through with plans to introduce a $2.25 trillion “infrastructure” investment plan, which will undoubtedly increase global inflation after introducing a $1.9 trillion stimulus package.
Third, more infrastructure spending will inevitably raise commodities costs. Although the increase in commodity prices has a direct impact on the PPI, it eventually filters through to the CPI to create the overall impression of inflation. In parallel, the virus and the weather led to the beginning of underemployment in the mining sector in Brazil and other nations, escalating the disparity between supply and demand for commodities and increasing the rise of commodities.
Fourth, economies recovered from the epidemic and began to rise quickly, which increased worldwide prices. However, global supply chains have not yet fully recovered.
Fifth, economic stimulus measures have increased inflationary expectations. Once expectations are formed, inflationary expectations have a self-forming mechanism that will cause them to materialize. The global capital and financial markets’ initial creation of inflationary expectations was based on fact. U.S. inflation expectations are a primary cause of the jump in 10-year Treasury yields, which has caused major jitters in the world’s financial markets. rising 10-year Treasury yields in the US. The level of spontaneous financing rates on the worldwide market will undoubtedly rise as a result.
Inflation is decreasing!
Since mid-2021, the situation with regard to global inflation has changed from “moderate” to “high,” and currently, a number of figures indicate that it is beginning to peak, but the data also indicate that it is still at a relatively high level. This demonstrates that even though inflation data is gradually declining from decades-high levels, it will still require time and patience to return to normal levels. As a result, major central banks will continue to face significant challenges from inflation in 2023.
The actions taken by the major global central banks to sharply boost interest rates may also start to have an effect after this year’s inflation climbed faster and for longer than economists anticipated, though part of the impact may linger.
According to economist Tom Orlik, the worst is still to come for policymakers despite the current surge in prices. “Even if the consumer price index decreases marginally, it will still be substantially over the current range maintained by most central banks around the world, forcing additional tightening of policy as the prospect of recession looms,” Tom Orlik emphasized.
Commodity prices rose sharply in the second half of 2020 to 2021, as global demand recovered rapidly in the wake of the global epidemic, but since 2022, commodity prices have largely stagnated and topping signals have become very clear.
Supply chain challenges complicated by the epidemic and the escalating Russia-Ukraine conflict are being effectively mitigated. Seaborne container spot rates have been moving downward so far this year, which is probably the clearest sign that supply chain issues are easing.