Inflation in most countries has soared to multi-year highs, driven by a rebound in economic activity and a further straining of rampant supply chain disruptions.
While economists were expecting inflation to moderate this year with signs of supply shocks easing, Russia’s invasion of Ukraine and recent lockdowns induced by a resurgence in Covid-19 cases in parts of China, a major manufacturer, have derailed much of that optimism.
Food and energy prices have hit record highs following a spike in inflation.
According to UBS chief economist Paul Donovan, the current spike in inflation is “historical”, although he says it won’t last at these levels for much longer.
It has been provoked by the extraordinary demand for goods in 2021 as countries emerged from lockdowns, shops opened and people were able to go out and buy stuff with money saved during weeks of economic inactivity, Donovan was quoted by the World Economic Forum.
“We got this extraordinary surge in demand for goods and that has pushed off inflation, because we did actually also see an extraordinary surge in supply of goods. But the demand for goods was so unusual it overwhelmed the supply and when demand is greater than supply, you either get shortages or you get price increases,” Donovan noted.
What we had was a mixture of both, but some of that surge in demand pushed up prices. Now, that started to fade because, of course, by the end of last year in a number of countries, consumers’ stock of savings had disappeared so the demand was coming down.
“We’ve still got some of that inflation pressure there but it’s on its way out. If you look, for example, at television prices in the US or elsewhere, they were rising last year and are now falling, they’ve now actually got negative inflation. So we’ve started to see a correction, but there’s still enough of its lingering effects that adding to inflation,” Donovan said.
The global economy will expand more slowly than predicted three months ago, according to a recent Reuters polls of over 500 economists, who said higher commodity prices and an escalation in the Russia-Ukraine war could prompt another downgrade.
When asked to name the biggest two downside risks to the global economy this year, the top picks were persistently higher commodity prices and a further escalation in the Russia-Ukraine war.
They were closely followed by supply chain disruptions — exacerbated by the Russian invasion — followed by second-round inflation effects and over-eager central bankers.
The experts upgraded their inflation forecasts for nearly all the economies in question, underscoring a view that inflation will remain high and above most central banks’ targets for longer than previously thought.
Most were expected to go ahead with plans to tighten policy to counter inflation despite the risk of curbing growth or even, according to indicators in some markets, triggering recessions.
The performance of the world’s major economies is likely to be weaker than anticipated.
Clearly, inflation is rising and the prospect of a “cost of living crisis” looms for many people across the world.
Viewpoint
