Why inflation rates are increasing around the world

The cost of food and other basic items continues to climb in the United States, with the rate of inflation reaching a 31-year high. In October, the inflation rate remained above 5% for the fifth consecutive month, according to a World Street Journal report. The Consumer Price Index (CPI) rose 6.2% in October from the previous year in the country.

Globally, the situation remains similar to that of most countries facing rising costs of food, oil and other essentials, while wholesale prices also continue to rise.

What is inflation?

Simply put, inflation is the rate of increase in the general price level of any economic system. It is calculated by comparing the price of certain goods and commodities like food, energy and fuel each year. Most central banks prefer to have a relatively stable but positive level of inflation because it is better than the alternative of a recession.

A relative level of inflation encourages people to invest their money in the economy since bank interest rates remain low. Inflationary pressure is often caused by high demand and excess liquidity in the economy. Many experts believe the current inflationary pressure is due to fiscal stimuli that have increased the amount of liquidity as supplies remain low due to disruptions in the global supply chain.

What is causing inflation right now?

The current surge in global inflation is caused by two sets of factors. On the supply side, the prices of basic commodities like food and fuel are rising due to global conditions caused by the COVID-19 pandemic.

Labor shortages, extreme weather events, disrupted supply chains and other factors drive up food prices. The Food and Agriculture Organization’s (FAO) food price index, which tracks the most traded food prices in the world, stood at 123.5 points in July from 127 , 4 points in August. Food prices in August were 32.9% higher than the previous year.
The depletion of reserves, the booming economic recovery and undercapacity of production are some of the additional factors that are also pushing up fuel prices around the world. Coal shortages in Asia, natural gas shortages in Europe and an oil shortage around the world are driving up costs.

On the demand side, the global economy is overflowing with liquidity. With cash stimulus measures to support the economy during COVID-19 lockdowns, many households had excess money to spend. Restrictions on many businesses and industries also meant that excess cash was used to buy the only available but scarce resources. In light of reduced supply and increased demand, the prices of these resources have increased rapidly.

Why is inflation worrying?

Inflation can be very damaging at high levels when wealth is rapidly eroded by rapidly rising costs. Venezuela is currently in a state of hyperinflation with an inflation rate of several thousand percent, while countries like Sudan, Zimbabwe and Lebanon also have very high inflation rates.

In such economies, the prices of goods can quickly exceed the purchasing power of almost all of society, except for a fraction. Even at lower numbers, inflation can start to erode the savings that individuals have accumulated over the years.

What the experts have to say

While current inflation is a cause for concern for many and some even present the current phase as a prelude to a period of dangerous hyperinflation, most economists agree that the inflation rate will start to decline. by 2022. What is not certain, however, is the level at which inflation rates will stabilize once they stop rising.

With central banks expected to raise interest rates in the near future, a move that dramatically lowers the rate of inflation as more and more people prefer to accumulate increased interest on their savings and deposits, the current period of d inflation is expected to be transient for a short time, experts observe.

(Edited by : Shoma bhattacharjee)

First publication: STI

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