After emerging from the deep crisis caused by the coronavirus pandemic, the world economy is facing new dire scenarios with galloping inflation.
After inflation was anemic for a few years, despite numerous attempts by central banks to revive it and push the zone well below targets, price growth has suddenly exploded in recent months.
The initial rise in inflation was described by the US Federal Reserve and other major global central banks as transitory and seen as a temporary phenomenon, mainly caused by the rapid growth of economies in the post-pandemic period, which was expected to peak in early 2022 and thereafter. start to relax.
It appears central bankers misjudged as price growth accelerated beyond all expectations, driven by a variety of factors, which together pushed inflation to multi-decade highs. or records, with no sign of a spike so far.
Many economists believe that the surge in inflation did not happen overnight, but was the result of a longer-term process, pointing to a huge printing of money that was pumped into economies during the slowing of the pandemic, to keep them afloat and to keep interest rates ultra-low.
This points to one of the definitions of inflation that a large expansion in the total amount circulating in the economy leads to higher inflation.
In addition, the war in Ukraine has caused a chain reaction in rising energy and commodity prices, following the Western world’s decision to reduce and eventually ban imports of crude oil, natural gas , coal and a number of other raw materials.
Threats that the European Union’s economy, heavily dependent on Russian energy, with activity already significantly slowed, could suffer catastrophic consequences if imports from Russia stop, have triggered the domino effect which spread to Western economies but also caused global economic destabilization.
Significantly higher energy and commodity prices led to higher prices for finished goods which contributed to the second cause of rising inflation – cost inflation, while the sharp rise in prices, accompanied by persistent supply disruptions, led to the shortage of products that pushed their prices higher and highlighted the third cause of high price growth – demand-driven inflation.
The huge rise in natural gas prices, which rose from around $400 a year ago to over $3,000 in March and currently sits around $1,000, with expectations that the price of gas could climb to $3,500 per thousand cubic meters in winter, poses a serious threat to developed economies, such as the European Union and the United Kingdom.
At the same time, crude oil prices rose above $100 a barrel, after falling to near zero during the pandemic, although global supply was still stable and undisturbed.
This triggered a rise in the prices of food, electricity and many other essentials which contributed to the huge increase in the cost of living, putting even more pressure on households and businesses.
Current inflation in the United States is 8.3%, just below the 40-year high of 8.5% reached in March, raising hopes that inflation in the United States may have reached a top, however, economists are not too optimistic as the so-called core. Inflation, closely watched by the US central bank and used as an indicator of actual inflation, rose last month, adding to expectations that the Fed could opt for a more aggressive approach at the next policy meeting in June.
The U.S. central bank has already raised interest rates twice, starting with a 0.25% increase in March and 0.5% in May, and signaled multiple rate hikes of 50 basis points. in the coming months, confirming their commitment to restoring price stability, while President Biden has also said tackling high inflation will be his top national priority.
Inflation in Britain hit 9% in April, the highest in four decades, driven mainly by soaring energy prices.
Britain’s inflation, currently the highest of Europe’s five largest economies, but also of the Group of Seven countries, has further hurt the already high cost of living, which is in the deepest crisis since 1950.”
Soaring inflation has put UK households and the economy under increased pressure, with current government assistance so far insufficient to significantly improve the situation.
The outlook remains pessimistic, as the Bank of England forecast inflation to hit 10%, while economists see an increased risk of a further upside from the current deterioration in the geopolitical and economic situation.
The BoE has already hiked rates four times since December, the fastest in 25 years, and raised its benchmark interest rate to 1%, the highest since 2009.
The central bank aims to control the surge in inflation by sharply tightening its monetary policy.
European Union inflation hit a record high of 7.5% last month, boosted by soaring energy and food prices, prompting policymakers to act more quickly.
The European Central Bank said it would likely end its bond purchases in July and signaled it could start raising interest rates in the third quarter as the ECB still maintains the zero rate, set for the pandemic crisis.
Economists are expecting 3 or 4 hikes this year, hoping that the policy tightening would bring the runaway inflation which is currently nearly four times above the central bank’s target under control.
The deteriorating economic situation due to soaring inflation poses a strong threat that many developed economies could slip into recession in the coming months, with most central banks having already scaled back their growth forecasts for the remainder of 2022 and early 2023.