Inflation is on the rise around the world after Pandemic and the Russian invasion of Ukraine. Food and energy prices are hitting record highs around the world. April saw a CPI increase of 8.3%, while U. S inflation has stayed at a 40 year high.
The UN’s Food and Agriculture Organization (FAO) reported an increase of 12.6% between February and March. The cereal price index rose by an even greater amount – by 17.9%, reflecting a surge in global prices of wheat and grains. This happened largely due to export disruptions from Ukraine( the world’s largest wheat exporter).
But there is a question that needs to be answered. Where is Today’s Inflation Coming From?
This rise occurred due to high demand for goods in 2021 as countries emerged from a lockdown. After these lockdowns were lifted, people bought all sorts of things with their saved money during months of economic inactivity.
Another factor is:
Consequences of The War
Believe it or not but inflation was starting to fade, until the war in Ukraine wreaked havoc. See, Russia may not be significant as an economy, but it’s significant in commodities. This has led to higher commodity prices, partly because there have been constraints on supply, maybe because companies are less willing to purchase Russian oil.
Prices are not only going up because supply is constrained. It’s also going up over concerns about future supply.
Has Inflation Peaked?
I won’t lie to you, it’s hard to say whether inflation has peaked or not because it depends on where you live. If you live in the US then inflation probably peaked in March, if you live in the UK, it’ll be a little later.
There are 3 main reasons for that:
Fading Demand: Many of the areas where prices were being pushed up last year by extraordinary demand, are now seeing inflation rates come down. This will happen to more and more goods throughout 2022, as extraordinary demand fades, extraordinary inflation also fades.
Wage Cost To Price Spiral: Actually, we’re not seeing wage costs really rise and inflationary manner at the moment. Wages are about 70% of inflation in a developed country. If people are paid more because they work hard, that is not inflationary. In almost all economies, people are working harder. In almost all countries, GDP is above pre-pandemic levels, but employment is below pre-pandemic levels. This basically means that there are fewer people producing more.
Base Effects: Inflation is generally quoted as the year-over-year change in price. So what we say in march of this year is compared to the prices in a normal economy in march 2022, with the prices in a locked down economy in march 2021. Now, if you’re comparing normal to a lockdown, there’s going to be a change in price and it will be quite sizable as we go through this year. By June, we’ll be comparing a normal economy in June 2022 with a normal economy in June 2021, at least for the United States. And at that time, it is evident that the price change will be less significant. As a result, inflation rates will be lower year over year.
What’s the solution?
It may sound strange, but the best thing governments can do is do nothing. We need to understand that Central Banks can’t just suddenly change oil and cereal prices. Part of the pricing inflation story is already naturally coming down, and other factors like the impact of Ukraine War on food and fuel prices.
Its a totally different question whether governments should try and mitigate the consequences of higher inflation. Oil, for example, is taxed, so some governments may feel they could temporarily lower taxes. Governments can also reduce sales taxes on other products to try and make life a little more affordable. So there are things that governments can do to mitigate the impact on the cost of living in the short term, even if they can’t change oil supply and demand.
So this is why Inflation is so high, pandemic ruined economy, then War just ruined it. We all are going through hard times, but soon it’ll all be over. According to estimates, inflation will be back to normal by the end of this year and then everything will be back to normal.