The G10 inflation surprise index has been positive for 22 consecutive months, the longest streak of positive inflation surprises on record.
Even though new data is starting to match economists’ predictions more closely, recent CPI and PPI readings from Europe have shown that inflation is not a straight line that stays the same over time.
After falling for three months in a row, the global surprise index rose again in October. Even though leading indicators of inflation like house prices, energy costs, and shipping rates have already gone down a lot, the trailing CPI hasn’t caught up yet.
Based on indicators that look at the past, central banks are now at risk of overtightening, which would make a worldwide recession more likely.
The growth of the world economy is slowing more quickly and more widely than was expected, and inflation is higher than it has been in the last few decades.
Cost of Living
The problem with the cost of living, the fact that money is getting tighter in most places, Russia’s invasion of Ukraine, and the fact that COVID-19 is still going strong are all big parts of the forecast.
Global growth will fall from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023, according to forecasts. This is the worst growth since 2001, except for the global financial crisis and the worst part of the COVID-19 epidemic.
is expected to climb from 4.7 percent in 2021 to 8.8 percent in 2022, then fall to 6.5 percent in 2023 and 4.1 percent in 2024.
Monetary policy should stay on track to get prices back to where they should be, and fiscal policy should try to reduce cost-of-living pressures while staying as restrictive as monetary policy needs to be.
Inflation can be fought with structural reforms that boost productivity and loosen restrictions on the supply of goods.
But there needs to be global cooperation to speed up the switch to green energy and keep it from falling apart.
What causes global inflation?
Several variables, according to market analysts and strategists, are driving global price increases.
Kristina Hooper, the chief global market strategist at Invesco, says that demand-pull inflation and cost-push inflation are two traditional reasons why inflation is high right now.
According to her, demand-pull inflation happens when prices rise as a result of increased demand. Increased government spending can cause demand-pull inflation (for instance, by providing stimulus checks).
If consumers predict greater costs in the future, they are more willing to buy now, according to Hooper, and this becomes a self-fulfilling prophecy when it comes to inflation expectations.
the other form of inflation we’re seeing causes price increases when the supply of products and services is disrupted. High oil and natural gas costs are good examples.
According to Hooper, the global pandemic had a significant impact on growing inflation. “We switched the economy off and then back on,” she explains.
When the economy started to get better, many countries had trouble finding workers and keeping their supply chains running smoothly. “This contributed to a supply constraint precisely as demand soared,” Hooper observes.
Briefing.com’s chief market analyst, Patrick J. O’Hare, feels that the global pandemic was a key contributor to our inflation woes.
When the economy got better, Americans were eager to start spending again because they had stimulus money. To meet the extra demand, the job market had to move faster, but many people were still afraid of COVID-19 and didn’t want to go back to work.
This worry was not limited to American employees. “With the sources of production abroad being kind of clogged up by a shortage of available labor,” says O’Hare, “the supply chain snarl really ballooned.”
Effects of War
At some point, problems with finding workers and the supply chain started to get better. But then Russia invaded Ukraine, which caused a whole new set of supply problems.
“If we look at cost-push inflation, one of the primary causes is increasing commodity prices,” Hooper continues, describing what happened in early spring.
“It wasn’t just energy either.” “Agriculture is also involved.” She tells us that Ukraine has been called “the breadbasket of Europe” for a long time because it has so many agricultural resources.
Continuing through 2023
Living in the midst of a pandemic inside a global economy that depends on one another for everything from fuel to food means we’re all in this together.
Despite the fact that the entire world is suffering from inflation, Hooper is quick to point out that each economy is unique, as is its brand of inflation. It is entirely dependent on the individual conditions in that economy.
In the United States, for example, inflation is driven by both demand and supply. Some of the increases in energy and food prices were driven by demand, which central banks can control.
“If you raise rates enough, you can knock the economy over the head with a sledgehammer and temper demand,” Hooper says.
According to O’Hare, European countries such as the United Kingdom, Germany, Spain, and Italy have been damaged by Russia’s invasion of Ukraine because they are oil importers.
“There is only so much discretionary energy usage,” Hooper explains. “If it’s chilly in the winter, you have to heat your house.” Therefore, there’s nothing the European Central Bank can do to help relieve energy inflation.
Some Asian countries also rely on Russia for commodities, which drives up prices as a result of Russia’s conflict with Ukraine.
Turkey, for example, is reliant on Russian oil and natural gas. China, on the other hand, wants to be independent of energy, which makes its inflation rate lower than that of most other countries.
What’s going on across borders or oceans is similar to what’s going on in the United States with rising gas prices. “People have to make decisions about where they’re going to spend their money,” adds O’Hare.
“And, as energy costs continue to eat away at your spare income, the trade-off is that you may have to cut back on discretionary purchases, slowing your country’s rate of economic growth.”
In the United States, inflation did not occur overnight and will not end overnight. “There will be no miracles,” Hooper adds. “It will take time for inflation to fall to the Fed’s target.”
Hooper also reminds us that the Federal Reserve cannot control everything. “The Fed can only influence demand,” she says. “It cannot regulate Russia’s invasion of Ukraine, nor can it manage China’s supply chains.”
While it will take time, some supply-chain tensions are beginning to ease, and the COVID situation is improving. According to Hooper, we may not see any relief from inflationary pressures until far into next year, and possibly not until the end of 2023.