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The Financial Express

Rising global inflation risks the recovery from pandemic


Rising global inflation risks the recovery from pandemic

Inflation is back in the world in a big way. Many governments, especially developed nations are feeling heats the most and central bankers are taking measures to contain the inflationary pressure. Little predictions were there on this global price spiralling coming after four decades. Supply chain disruption coupled with rising demand have already inflated the price of fuel, rent, food, and other essentials. Now Russia-Ukraine conflicts make the thing worse.

Countries across the world pumped plenty of cash into the economy to keep the wheel running or protect people in general in the time of Covid-19 despite weakening supply chains during pandemic.

America was most generous in injecting around $4 trillion into the economy. The decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends. The world's manufacturing mechanism was producing, shipping and delivering more goods to American consumers than it ever has, as people flush with cash to buy luxury goods, but supply chains just haven't been able to keep up with that amplified demand.

As the rich have amassed more spending power due to this, the United States (US) recoveries from recessions depend on a jump in their discretionary spending, according to data analysed by The Washington Post. This represents a direct challenge to President Biden's stated goals of rebuilding "our economy from the bottom up and the middle out."

Champagne, skirts and shaving kits are some items that have sold at higher rates in recent weeks, according to data of March last year from NielsenIQ, Refinitiv and StyleSage following $1,400 stimulus cheques.

US inflation hit its fastest pace since 1982 in January, pushing prices up at a 7.5 per cent annual rate, the third straight month in which inflation exceeded an annualised rate of 6 per cent. The average price of a used car in the US was $28,205 (£20,782) at the end of December, according to Cox Automotive, the first time the median price of a second-hand vehicle has surpassed $28,000.

The Federal Reserve is expected to start raising interest rates from March and not slow down until well into 2023, though the slope of the increases might be a bit gentler. But it is not sure, with inflation surging worldwide it remains to be seen how soon, or whether, the central bank will succeed.

Russia-Ukraine tensions are adding upward pressure on energy prices and pointing to high inflation becoming less transitory than expected. Some economists fear a general return to the chronic inflation of the 1970s. Over the past year, East Asia has largely been an exception to the worldwide pattern - but even here, prices have started to accelerate.

CHINA ESCAPE HIGH INFLATION: The world's second largest economy China has surprisingly escaped the global wave of inflationary pressure, most probably because of its prompt measures to contain the virus from spreading. This has helped the country to escape both the demand and supply side shortages.

According to China's National Bureau of Statistics, consumer price inflation dropped to 0.9 per cent in January below December's 1.5 per cent. January's result represented the weakest inflation rate since September 2021. Meanwhile, the trend pointed up mildly, with annual average inflation coming in at 1.0 per cent in January (December: 0.9 per cent). Lastly, producer inflation fell to 9.1 per cent in January, from the previous month's 10.3 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.

China warned the US and Europe against a rapid rise in interest rates that would "slam on the brakes" of the global recovery from the pandemic. In a virtual speech to open the World Economic Forum's Davos Agenda in January last, Chinese president Xi Jinping also said that while global inflation risks were emerging, policymakers should strengthen economic policy coordination and develop policies to prevent the world economy from dipping again.

Analysts believe cooling inflation could provide room for the People's Bank of China (PBOC) to ease policy to support the slowing economy, even as major central banks elsewhere tighten policy.

China's state planner in early February said global inflation is likely to persist for some time, but expressed confidence in the country's ability to cope with abnormal price fluctuations. The National Development and Reform Commission (NDRC) said it expects producer price inflation to slow further this year while consumer price inflation picks up.

EMERGING MARKETS: Emerging markets and developing economies (EMDEs) have been hit by similar waves of price increases, with 78 out of 109 countries also confronting annual inflation rates above 5 per cent. That share of EMDEs (71 per cent) is about twice as large as it was at the end of 2020. Inflation thus has become a global problem - or nearly so, with Asia so far immune. According to World Bank's most recent Global Economic Prospects, the COVID-19 supply shocks are more diverse and therefore more uncertain unlike the oil-based supply shock of the 1970s.

As Fed rate rises, it usually attracts capital from emerging economies, which creates currency depreciation, leading to rise in inflation through higher import prices of commodities. Currency depreciation (owing to lower inflows of foreign capital and downgrades of sovereign credit ratings) contributes to inflation among imported goods in emerging economies as well. And because inflation expectations in EMDEs are less anchored and more attune to currency movements than in advanced economies, the pass through from exchange rates to prices tends to be faster and more pronounced.

The longer-term costs of delaying action would be high to economies. US and other advanced economies failed to tackle inflation quickly during the 1970s, they ultimately needed far more draconian policies, which led to America's second-deepest post-war recession, along with a developing-country debt crisis.

Inflationary pressures, however, likely to ease over the coming year, according to the International Monetary Fund (IMF), which sees rates cooling to below 5 per cent for most emerging economies.

In Turkey, inflation is expected to slow to about 15 per cent while Brazil is expected to see it moderate to just over 5 per cent over the year ahead. The annual inflation rate in Bangladesh eased to 5.86 per cent in January of 2022 from 6.05 per cent in the previous month amid a slowdown in prices of non-food items (6.26 percent vs 7 per cent).

Growing volume of public debt for deficit finance, increased public expenditures under various stimulus packages, production levels still behind pre-pandemic levels 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.

IMF forecast in the last week said the headline consumer price index (CPI) inflation in Bangladesh to rise to 5.9 per cent in FY22, driven by higher international commodity prices. However, the IMF warned in January that inflation could persist longer than originally expected in many countries, as supply chain disruptions continue into 2022.

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