Today's Inflation is a Global Phenomenon with Global Roots

The price inflation that Americans are experiencing isn't a localized US event; it's happening all over the world because its roots are global. Because of the pandemic, labor shortages, and supply chain issues, there are too many dollars chasing too few goods and services. When that happens prices naturally rise and that's exactly what's happening globally.

In the spring of 2020 as Covid-19 spread, factories around the world shut down and it was like pulling the plug on the global economy. But as governments moved to shore up the economy in 2020 and 2021, consumers started buying again and today demand for products has mushroomed beyond the market’s capacity to produce all the stuff consumers want.

Nationwide Financial: "Inflation typically increases coming out of downturns as demand outpaces supply early in the recovery, but this tendency has been exacerbated by COVID-19 impacts. Demand for many goods dropped in 2020 and remained lower into 2021 as further waves of COVID cases led to government restrictions on consumer behavior. As cases waned in the spring of 2021, these restrictions were mostly lifted, driving a surge in demand. Supply conditions of many inputs (I.e. – lumber, steel, and microchips) were depressed during the pandemic, too — in anticipation of reduced demand with the downturn and due to pandemic limits on the number of workers. Once the economy reopened more fully, total production within many industries lagged as businesses had difficulty finding inputs and workers. The resulting supply crunch led to higher costs for producers which were passed into many of the prices seen on shelves."

Energy price increases have also contributed to inflation. When the pandemic first hit in 2020, demand for gasoline plummeted as employees started working from home and dramatically reduced their vacation travel. That sharp decline in demand caused gas prices to sink below $2.00 in the Spring of 2020. In response, the Organization of the Petroleum Exporting Countries [OPEC] and other oil-producing nations slashed production in order to stabilize falling prices.

As the global economy recovered from the pandemic, oil producers were slow to increase the global supply. OPEC didn't start increasing production until July 2021 and by then the price of oil was surging. This year, US oil producers also began increasing production to take advantage of rising prices, but it's going to take months for that oil to hit the market. And while producers were ramping up, Vladimir Putin invaded Ukraine, and Western nations responded by sanctioning Russian energy exports. That further reduced the flow of oil globally and spooked the oil futures market.

All of these factors together have contributed to price increases in nations around the world. For instance, wholesale prices in Japan increased 10% in April, marking the sharpest gain on record, amid surging energy and raw-material costs following Russia's invasion of Ukraine. A growing number of Japanese companies are raising retail prices in line with increasing wholesale costs, and consumers are starting to feel the pinch.

The inflation rate in India increased to 7.79% in April, a 8 year high, and the Reserve Bank of India expects it to remain elevated as the war in Ukraine continues to impact energy and food prices.

Inflation in the United Kingdom soared to a 40-year high of 9% in April as food and energy prices spiraled. The UK labor shortage caused by both Brexit and the pandemic is contributing to the problem as businesses have been forced to increase salaries and benefits to attract workers.

The annual inflation rate in Germany rose to 7.4% in April, accelerating from 7.3% in March. It was the second straight month of record high inflation while also marking the fastest pace in consumer price increases since at least 1981, boosted by the rising cost of energy and food.

Overall, the inflation rate in the European Union is running at 7.8%, but 11 nations are suffering rates above 9% including Spain [9.8%], Netherlands [11.7%], and Lithuania [15.6%].

In response, central banks in these nations are all following the same game plan as America's Federal Reserve by raising interest rates. Interest rate hikes will reduce demand by increasing the cost of borrowing. Lower demand will reduce price inflation, but it will take some time and there is always the possibility that it could slow economic activity too much.

In the meantime, governments around the world are facing the same crisis and incumbent leaders like US President Joe Biden are under intense pressure to solve a problem that they didn't create and over which they have limited control. Last week Anthony Albanese of Australia’s center-left Labor Party defeated conservative Prime Minister Scott Morrison and polling showed that inflation was a top issue in the election.

BBC: "Professor Nicholas Biddle from the Australian National University (ANU) says rising prices were "high on the minds" of many voters of various political persuasions."

And, in the US, if you listen to Republicans, today's high prices are President Joe Biden's fault. They believe that inflation is their strongest issue in this Fall's federal midterm elections. They may be right; rising prices have battered Joe Biden’s approval ratings. Blaming Biden is unfair, of course, but it's how politics works; Presidents get both the blame and the credit for how the economy is functioning even if they had little to do with it.

#economics #research #politics

By: Don Lam & Curated Content