Inflation is riding high in the global economy

Not the haunting of a 'spectre', as Marx and Engels declared in a different context in 1848, inflation is riding high in the economies of the world -- small, medium and large -- and is threatening to go out of control. Already it has recorded an all time high in major economies with many of the rest most likely to follow in the footsteps soon.
First, to have an idea about the magnitude of the problem an overview of inflation in some countries at this point of time may be helpful. In the United States (US), the world's largest economy, the Labour Department's June 2021 data showed the consumer price index (CPI) rising by 5.4 per cent compared to a year earlier while the alternative measure, the commerce department's personal consumption (PCE) index, rose by 4.0 per cent over the same period. Core inflation, excluding food and energy, represented by CPI had been somewhat tamer than headline inflation represented by PCE but was already higher than the 2 per cent increase targeted by the central bank, the Federal Reserve. Many economists and policy makers thought at the time that the rise was the result of the recovery of the economy from the fallout of the pandemic and might not rise any further. But proving them wrong, in September, the headline inflation rose higher and was estimated to be 5.4 per cent measured by CPI. The core inflation, on the other hand, ticked up by 0.2 per cent about the same time. Food prices rose by 0.9 per cent and house rent was higher by 1.5 per cent, both of which accounted for more than half of the increase in headline inflation. This was aggravated by 1.3 per cent rise in energy price. The December data for CPI ( headline inflation) showed further year to year increase, estimated at 7.0 per cent which was a 40 per cent high record. Even core inflation (PCE) rose to 5.5 per cent during this time.
As regards the causes for the CPI index, fingers have been pointed at first to expanded public expenditures under stimulus packages under Trump administration to cope with the impact of the pandemic amounted to US$982 billion. During Biden administration's first year public expenditure rose to US$ 7.4 trillion in 2021 compared to the 2019 budget of US$ 4.4 trillion. With growth of output (GDP) estimated at 3.4 per cent, the stimulus money injected into the US economy has created excess demand, causing the prices of consumer goods to rise.
The broad money supply has been augmented by money supply growth of 26 per cent through the easy money policy (QE) of the Federal Reserve. Though Fed has been thinking aloud about holding back its US$120 billion-a-month asset purchase programme that was started during pandemic as part of its QE policy, it has not yet started to roll back. Nor has the zero interest rate been revised upward to reverse the easy money policy. Fed's reversal of its QE policy may reduce the supply of money in the economy but the inflationary consequences of monetary overhang will take a year or two to be stabilised, according to analysts.
As if the pressure on prices from the demand side was not enough of a problem, problem from the supply side has exacerbated the inflationary situation. Because of the pandemic, the prevailing supply chain became dislocated with fewer freight ships, limited freight space available, higher freight charges, fewer truck drivers and costlier warehouse space. All of these have combined to delay and make more expensive the supply of inputs ( eg. micro chips for auto industry),raw materials for industries and supply of other traded goods, leading to increasing prices. This second cause for rise in inflation is more serious than the first because return to normalcy in this sector is not likely before 2023,it has been estimated.
On the other side of Atlantic, the headline inflation in the UK jumped to 5.4 per cent in December, 2021, its highest in 30 years. This has deepened cost of living crisis, squeezing household income and resulted in putting more pressure on Bank of England(BoE) to raise interest rates. The large annual increase in the consumer price index reflected widespread spikes in the costs and prices of most goods, due to supply chain strains, excessive public expenditures made as stimulus to individuals, business and industries to weather the crisis caused by the pandemic. The rate of inflation is expected to rise even higher in February, 2022 to levels in excess of 6 per cent. With gas and electricity prices due to jump to reflect much higher wholesale energy price and higher contribution to National Health Services (NHS) the inflationary pressure has very little prospect of easing in the medium term. According to analysts, what is most worrying is that inflationary pressure has come mainly from an increase in the price of food. Not only does this provide additional evidence that inflation is rising but also becoming endemic rather than transitory.
Sooner or later, the BoE will adopt a tight monetary policy to stem the tide of money supply. But here a fine balance has to be made lest investment is discouraged before economic recovery is complete.
Across the English channel the situation is a little different, even if of degree and not of kind. Germany, Europe's economic powerhouse, registered an inflationary rate of 5.3 per cent (Decrmber,2020 to December, 2021) while Spain and Italy posted rates of 5.5 and 6 per cent respectively. As for the causes behind the inflationary rises, the 'usual suspects' of post- pandemic period are responsible and this time around for good reasons and not as scapegoats, a la Casablanca film.
Having overseen the biggest injection of monetary stimulus in the history of Europe's single currency, including the 2.2 trillion euro worth of government bond purchase and a similar heavily subsidised loan to banks, the European Central Bank (ECB) is now under pressure to scale back its support to the economy through easy money. But ECB is reluctant to raise interest, still scarred by criticism for having raised rates during the recent debt crisis. Most analysts expect ECB to continue buying bonds and keep interest in the negative territory, at least until 2023.This means ECB is willing to be a dovish outlier, compared to many central banks. The ECB president pledged, after a policy review meeting recently, to ensure conditions to remain favourable to finance governments, households and firms and described the recent surge in inflation as a ' hump' that would decline in 2023. It is obvious from the complacency that European Union countries are not plagued to the same degree by supply chain bottlenecks as other developed countries. Analysts think that ECB is bound to be the slowest to raise rates after it spent much of the past decade struggling to avoid Japan style deflation. Euro zone economic activity and employment levels also remain weaker than in the US and UK. On all fronts, the risk of a self-sustained wage- price spiral looks much lower in the euro area than in the US and UK, analysts think.
In Asia, China, the world's second largest economy where Covid pandemic started first, has surprisingly escaped the global wave of inflationary pressure, most probably because of its prompt and often draconian measures to contain the virus from spreading. This has helped the country to escape both the demand and supply side shortages. According to calculations made by IMF staff and Haver Analytics inflation in December, 2021 was only 2.5 per cent. The only sector that has been affected badly during the pandemic is real estate but that is because of greater supply than demand, an intermittent problem of the sector even in normal time, i.e., absence of pandemics.
As regards Japan, the world's third largest economy, the Bank of Japan (BoJ) has shifted its view on inflation for the first time since 2014, driving the Yen lower as the nation faces the monetary pressure on prices of food and energy. Monetary pressure stemmed from the big stimulus of 40 and 30 trillion Yen in 2020 immediately after the pandemic breakout historic change. In November, 2021 the new prime minister announced a record 56 trillion Yen stimulus package.
On the interest rate setting, despite historic change of view the BoJ made no change in its monetary stance, opting to keep its negative interest rate, asset purchases and bond yield curve policies unchanged. Meanwhile Japan's price rises, though striking in a country that saw flat or falling prices for years together, remain lower than elsewhere in the world, particularly US and Europe. The BoJ revised its inflation projection from 0.9 to 1.1 per cent for the fiscal year starting from April, 2022. The BoJ said that a pickup in Japan's economy had become evident and has revised its price risk assessment from 'skewed to the downside' to 'generally balanced'. The central bank left a minus 0.1 per cent targeted interest rate unchanged and pledged to guide long-term rate around zero as inflation remained below its 2.0 per cent target. According to calculation by IMF staff and Haver Analytics headline inflation measured by CPI in emerging economies and developing ones in December 2021 was 3.0 per cent. However, prices of goods and services have risen since December last and in most of these countries the CPI index figure is above 5 per cent.
In Bangladesh the present (January, 2022) figure for headline inflation is above 6.0 per cent, overtaking the target rate of 5.70 per cent. The Asian Development Bank (ADB) had made a forecast of 5.8 per cent. Growing volume of public debt for deficit finance, increased public expenditures under various stimulus packages, production levels still behind pre- pandemic levels and expenditures for mega projects may explain the rise in prices encapsulated by headline inflation figure in Bangladesh. The incipient depreciation of Taka may also have added some pressure on price levels. Like most other countries the post-Covid recovery involves a balanced management of demand and supply, a delicate exercise in macro-economics the like of which has not been seen before. From policy making point of view nothing can be treated ' business as usual'.

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