Inflation is a measure of the increase in the general price level of goods and services over time. It is a normal part of the economic cycle, but when inflation rises too quickly or becomes too high, it can have negative consequences for an economy and individuals. In many countries across the world from the USA to the UK, this is exactly what is happening. But why is it happening?
The current worldwide inflation surge is caused by a combination of factors that we will discuss here in more detail.
Supply chain disruptions
The Covid-19 pandemic has disrupted global supply chains, leading to shortages of certain goods and services. This has led to an increase in prices for those goods and services as the supply is not able to meet demand. This has particularly affected goods that rely on international transportation, such as electronics and automobiles.
Commodity prices
The prices of commodities such as oil and metals have increased, which can contribute to inflation. This is mainly due to the fact that the demand for these commodities has increased as the global economy is recovering from the pandemic. Additionally, supply disruptions caused by the pandemic have also contributed to the increase in commodity prices.
Monetary policy
Central banks have been implementing monetary policies such as low interest rates and quantitative easing to boost economic growth. These policies can lead to an increase in the money supply, which can contribute to inflation. When interest rates are low, it makes borrowing cheaper and this increased borrowing can lead to increased spending and inflation.
It is important to note that inflation and deflation are opposite sides of the same coin, where inflation is an increase in the general price level of goods and services. And as for what is deflation; this is a decrease in the general price level of goods and services. Central banks use interest rates as a tool to steer the economy, keeping it in a healthy balance. While a low interest rate environment can fuel inflation, a high interest rate can lead to deflation.
Fiscal policy
Governments have been implementing fiscal policies such as stimulus spending and increased public spending to support the economy. This can lead to an increase in demand and contribute to inflation. Additionally, the increased government spending can put pressure on government finances and lead to government debt, which can also promote inflation.
Reopening of the economy
As countries such as China are reopening their economies, as discussed here, this could lead to an increase in demand for goods and services, which can contribute to inflation. As people return to work and businesses reopen, demand for goods and services increases, which can lead to price increases.
Pandemic-related costs
The costs associated with the pandemic, such as PPE and testing, can also contribute to inflation. Businesses and governments have had to spend more on these items, which has led to an increase in costs that are passed on to consumers.
Labor market
A tight labor market can lead to an increase in wages, which can contribute to inflation. When unemployment is low and there are more job openings than job seekers, workers have more bargaining power and they can demand higher wages. This increase in wages can then lead to an increase in the cost of goods and services.
International factors
Factors such as currency fluctuations, trade tensions and geopolitical risks can also contribute to inflation. For example, a decline in the value of a country’s currency can make imported goods more expensive, leading to inflation. Additionally, trade tensions and geopolitical risks can disrupt global supply chains and lead to shortages of goods, which can also contribute to inflation.
It’s worth noting that these factors are not mutually exclusive, and they may interact in complex ways. Additionally, inflation can have different impacts on different groups of people – for some people, it may have positive effects, but for others, it can be negative. Central banks and governments around the world are closely monitoring inflation and taking action to keep it within a healthy range. As such, it would be in your best interests to read up on the best way to safeguard your business in a possible recession.